TCS has reported yet another strong quarter with revenues of $2,244m (+4.7% QoQ, modestly above our estimate of $2,231m. In rupee terms, revenues grew 5.1% QoQ to R101.6 bn. The robust rise in revenue was because of strong volume growth (2.9% QoQ) and a pricing improvement of 80 bp (basis points) compared with Q3. The pricing increase comes on the back of a 180 bp QoQ rise in pricing in the previous quarter.
Ebit (earnings before interest and taxes) margins declined by a modest 6 bp to 28% vs our expectation of a 68 bp decline. Net hiring in the quarter of 11,700 (+6.3% QoQ) was noteworthy, particularly as it was following robust 6.5% and 7.2% growth in Q3/Q2.
The majority of incremental revenues came from North America, growing +4.9% QoQ, and Continental Europe, up +11.9% QoQ. Latin America bounced back with 8.5% sequential growth, while APAC, up 9.7% QoQ, continued to perform well (+57% YoY for FY11). The UK rose 1.8% and India was up 0.5%, relatively muted performances. Most sectors delivered upper-single-digit growth, except telecom, which continued to be the laggard. The company?s total headcount went up to 198,614. Attrition remained flat and is reported to be 14.4% LTM (last twelve months). Utilisation rates excluding trainees slipped 140 bp from 83.8% in Q2FY11 to 82.4%.
The management showed optimism for FY12 with a strong deal pipeline (chasing 20 large-sized deals) and guidance to a 60,000 gross headcount addition. Utilisation is expected to increase in the next quarter as the large number of trainees currently on bench is expected to become billable. The management guided an increase in pricing post-Q1FY12 owing to strong demand and stronger growth in discretionary services. Management reaffirmed a strong demand momentum as clients are now looking to start new growth and long-term initiatives, and are not just focused on cost cutting. Driven by higher growth in discretionary services, the company expects pricing to improve as well in FY12.
The qualified pipeline has grown over the year and TCS has been one of the top-15 global vendors in terms of deal wins in Q4; the company signed seven large deals in Q4. On profitability, management expects utilisation to remain sustainably high in the 82-84% range, owing to scale benefits, and therefore expects to maintain FY11 profitability levels in FY12 as well. Headcount guidance is 60,000 for FY12 (gross), including fresh campus hires of 35,000.
We remain Overweight on the stock but believe earnings upside from current estimates is unlikely. However, considering the strong demand outlook and high visibility, current valuations are unlikely to shrink and therefore stock returns should be at least in line with earnings FY11-13e CAGR (compound annual growth rate) of 22% for TCS (including the impact of a one-off tax increase in FY12). We roll our estimates over to FY13, valuing the company at 22x (at a 10% premium to Infosys owing to its better operational performance) our FY13e EPS (earnings per share) of R61.57, and revise our target price to R1,360 (from R1,300).