TCS delivered 1.6% quarter-on-quarter revenue growth (cc—constant currency—terms), below our estimate of 2.2% q-o-q, largely due to a greater shift to offshore. Energy, Telecom and Insurance were weak, with the management indicating that these headwinds will continue in FY16 while growth in its remaining sectors, notably BFS (banking and financial services), retail and manufacturing, is expected to be healthy.
Large client additions, along with key deal wins, came in healthy while gross employee additions for TCS also remained strong in Mar-15. We continue to assume a stable demand scenario for FY16 in which TCS’ strength in execution should lead to industry leading revenue growth. We retain our OW (overweight) rating as we raise our 12-month price target to R2,975.
Shift to offshore impacts top line: TCS’ Q4FY15 USD revenue declined 0.8% q-o-q (1.6% cc growth; our estimated 0% q-o-q in USD) due to a 0.6% negative impact of a greater offshore shift. Its Ebit margin (adjusted for employee rewards) expanded by 20bps q-o-q , above our estimate of a 44bps decline due to better realisation and higher offshore mix.
TCS awarded a one-off bonus of R26.2 bn to its employees to mark the 10th anniversary of its IPO. Volume growth of 1.4% q-o-q was led by strong performances in the financials, retail and manufacturing verticals. The management noted that its cloud platforms clocked in revenue of $125m (c1% of total revenue) for FY15, up 55% y-o-y.
Healthy operating metrics: TCS signed nine large deals in Q4FY15 with the number of clients in the >$50m and >$100m revenue buckets increasing by three and four, respectively. The deal pipeline remains strong with a healthy project backlog. Gross hiring at 14,395 was strong while utilisation (ex-trainees) also declined marginally by 60 basis points q-o-q.
Commentary on 2015 outlook: The management noted that the demand environment in the energy and telecom verticals are to remain challenging while weakness in Diligenta revenue is expected to continue for some time. However, it expects the banking and financial services vertical to grow ahead of the company average in FY16 while a healthy outlook is also expected for the remaining verticals.
Revising estimates and price target: We increase our FY16/17 earnings per share estimates by 9%/6%, largely due to changes in our currency estimates (R/USD of R64.5 for FY16 vs. R61 before) and pushing up our price target to R2,975 (20x FY17e EPS).
Mar-15 results summary
TCS’ revenue of $3,900m (-0.8% q-o-q, 1.6% q-o-q cc) was below our estimate for flat USD revenue. The CC growth of 1.6% q-o-q was led by (i) 1.4% q-o-q volume growth; (ii) +80bps positive impact of change in realisation; and (iii) (iv) the -60bps impact of off-shoring. The Ebit margin improved 20 bps q-o-q (excluding employee rewards of R26,279m) as the cross currency impact of -50bps was offset by higher realisations and the better offshore mix. Including the impact of employee rewards, the Ebit margin came in at 16.4% (down 10.7% q-o-q)
The BFS vertical grew by 13% y-o-y in FY15 (cc terms) while the weakness in Diligenta led to a c10% (cc terms, y-o-y) growth of the banking, financial services and insurance vertical. Growth in the BFS vertical is expected to continue in FY16,while weakness in Diligenta revenue could continue in FY16. Energy and telecom could be two other verticals leading to headwinds for revenue for FY16. Furthermore, client budgets are expected to increase modestly in cc terms and will be largely similar to the FY15 budgets.
Healthy employee additions
Attrition rates in IT services increased marginally by 40 bps to 13.8% in the Mar-15 quarter. Utilisation rates (ex-trainees) declined by 130bps to 85.4%. Gross additions were the strong at 14,395. TCS plans to hire 60k employees in FY16, campus offers for which have already been given out.