TCS: Beginning with a bang; Rating 'Outperform'

Updated: Jul 28 2014, 16:41pm hrs
Revenue surprise despite lofty expectations: TCS continues to grow at an impressive pace, especially given its size. Revenue rose 5.5% quarter-on-quarter (USD) and managed to come slightly ahead of expectations which were running high. This was the best growth since the June-11 quarter when the revenue base was 35% lower. After a weak Q4FY14, domestic revenue grew about 4% q-o-q in INR terms (2% y-o-y). International revenue grew by 5% q-o-q and 18% year-on-year (US revenues grew at 6% q-o-q while Europe revenues grew at 5% q-o-q in USD terms).

Client metrics continue to be robust. Clients with billing of more than $50m revenue annually increased from 53 to 58 q-o-q, while those billing more than $20m increased from 136 to 144.

Growth was fairly broad-based across geographies, industry segments and service lines. The insurance portion of financial segments was one weak area revenue declined sequentially .

Margins surprise in a seasonally weak quarter: Ebit margins dropped 280 bp q-o-q due to the INR appreciation, annual wage increases and revised depreciation norms, better than our expectations (we had estimated 360 bp q-o-q decline).

Click here for graph

Utilisation further expanded by 190 bp q-o-q (including trainees) and 150 bp q-o-q (excluding trainees). At 85.3%, utilisation excluding trainees has expanded by 260 bp y-o-y. The number comparable to what is reported by peers would be 400-500 bp lower.

Attrition increased by 70 bp q-o-q and 150 bp y-o-y to 12% but remains the best in the industry by far. All the IT companies that have reported Q1 result so far have indicated a q-o-q increase in attrition. TCS maintained its target of 55,000 hires (gross) in FY15, of which 15,000 were hired in Q1.

Special dividend payout: TCS paid a special dividend of R40 per share (on the 10th anniversary of IPO) and a quarterly dividend of R5. FY14 full-year dividend was R32. The special dividend would entail a payout of over R80 bn or about a third of the current cash balance. While over 70% of this payout accrues to its parent, we view these payouts positively as in the absence of any major acquisition, the cash just accumulates in the balance sheet.

TCS remains well positioned: Our estimates are broadly unchanged and we roll forward our target price to R2,850.Most companies that have reported so far have called out a constructive industry demand environment. TCS, by virtue of its positioning and execution, should continue to benefit from this.

Credit Suisse