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Transcript of TCS
IT Bellwether…...
INDIA
Institutional Research
Initiating Coverage
IT Sector Tata Consultancy Services Ltd
Investment Rationale
TCS is the largest firm in India providing IT services and solutions to a diverse set of
global and regional clients through its 105 global delivery centers in 44 countries with a
headcount of ~276,000 employees. It derives majority of the revenues (~56%) from US
region followed by Europe (~27%) and Rest of the World (~17%). The company derives
~75% of its revenue from BFSI(43%), retail (14%), telecom (9.6%), manufacturing
(8.4%) verticals with the balance from energy & utilities, transportation, healthcare and
others.
Client addition – would stay robust: We believe IT spends are likely to be cut, yet
India would continue to remain as preferred offshore destination for IT services on the
back of capability and cost effectiveness. Global IT vendors are likely to expand India
operations further and the effect of these trends is likely to have buoyant effect for com-
panies like TCS
Proportions of fixed price contracts are steadily increasing : TCS has the largest
proportion of revenues accruing from fixed price projects among its offshore peers. The
proportion of fixed price contracts averaged at around 48% between FY07 and FY09,
the ratio hovered at around 48.5% between FY10 and FY13
India's off-shoring potential : We maintain our belief that India will continue to domi-
nate the IT off-shoring market long time into the future. This is mainly because of the
fact that global clients are now trying to justify every dollar they spend towards technol-
ogy outsourcing. Hence, there is a growing pressure on technology budgets that will
force companies in the US and Europe to outsource to the low cost but high value desti-
nations like India.
Outlook : We initiate coverage on TCS with a Neutral rating and a 12 months target
price of Rs 2100. The key reason for our neutral rating is upside is priced in and we be-
lieve USD/INR prices have bottomed out. However, we are optimistic on TCS’s market
opportunity and competitive positioning. At CMP TCS currently trades at 21.9x at its
FY15E EPS of Rs.95.5, which reflects a significant premium vis-a-vis other large cap IT
companies. We believe the company to maintain its current operating margins and ex-
pect to plough back currency gains into the business. We further believe the large size
of the addressable global market, with relatively low current level of penetration sug-
gests significant headroom for future growth.
Key Data
Bloomberg Code TCS IN
Reuters Code TCS.BO
NSE Code TCS
BSE Code 532540
Current Share o/s (mn) 1957.2
Mkt Cap (Rs bn) 4,018
52 WK H/L (Rs) 2078/1055
Face Value (Rs) 1.0
Shareholding Pattern (%)
Promoters 74
FII 15.7
DII 5.9
Others 4.4
Price Performance (%)
Period 1M 6M 1yr
TCS -5.4 35.7 49.3
Nifty 4.1 -3.7 1.1
Date: 8th October 2013
Analyst:
Vikas Jain
Ph. No. 022-30641653
Rating Nuetral
Target Price 2,100
CMP 2,089
Upside (%) 0.5%
Nifty 5,906
Sensex 19,895
Source: Company, Networth Research
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TCS Nifty
Particulars (INR Cr) 2012A 2013A 2014E 2015E
Income from Operations 48,894 62,989 81,643 89,705
growth 31.0% 28.8% 29.6% 9.9%
EBIT 13,517 16,960 23,093 25,049
growth 29.4% 25.5% 36.2% 8.5%
PAT 10,413 13,917 17,291 18,691
growth 14.8% 33.6% 24.2% 8.1%
Key Ratios
EBITDA Margin 29.5% 28.6% 30.2% 30.3%
PAT Margin 21.3% 22.1% 21.2% 20.8%
ROE % 35.2% 36.0% 34.7% 30.1%
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 2
Source: Company, Networth Research
Investment Rationale
Client addition – would stay robust
We believe IT spends are likely to be cut, yet India would continue to remain as preferred
offshore destination for IT services on the back of capability and cost effectiveness. Global IT
vendors are likely to expand India operations further and the effect of these trends is likely to
have buoyant effect for companies like TCS, as the offshore outsourcing is becoming more
modular, as single large deal are broken into multiple pieces. To tap the same, TCS has
been continuously expanding its services and capabilities to become the preferred vendor for
any large offshore outsourcing deals.
From the below table it has shown that the trend in growth of revenue per client has declined
from 24.3% in FY11 to 19.9% in FY13.
However, the numbers of active clients have been increasing from last three years.
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
-
10
20
30
40
50
60
FY08 FY09 FY10 FY11 FY12 FY13
Revenue per client growth
100
110
120
130
140
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160
170
900
950
1,000
1,050
1,100
1,150
1,200
FY09 FY10 FY11 FY12 FY13
Active Clients New Clients
Revenue per client
(INR Cr)
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 3
Proportions of fixed price contracts are steadily increasing
TCS has the largest proportion of revenues accruing from fixed price projects among its off-
shore peers. The proportion of fixed price contracts averaged at around 48% between FY07
and FY09, the ratio hovered at around 48.5% between FY10 and FY13. Though managing a
large fixed price projects has its own limitations, since margins can get hurt if a particular pro-
ject encounters time and cost over runs, but TCS has long experience in managing fixed
priced projects and we believe more and more offshore projects are likely to move towards
fixed price from the time and material ones.
India's off-shoring potential
We maintain our belief that India will continue to dominate the IT off-shoring market long time
into the future. This is mainly because of the fact that global clients are now trying to justify
every dollar they spend towards technology outsourcing. Hence, there is a growing pressure
on technology budgets that will force companies in the US and Europe to outsource to the low
cost but high value destinations like India.
Moreover, clients are now getting into the phase of 2nd generation outsourcing. This means
that they are looking at more than one vendor to manage their outsourcing work. This has
considerably increased the addressable market. We believe that companies like TCS, with
their wide service offerings and execution capabilities, will emerge as winners on the back of
economic benefits that they provide. There are concerns with regard to re-shoring of IT ser-
vices related work particularly in the US, given the current political climate. However, the cost
advantages are still significant. For example, an 'entry level' engineer in India still costs less
than 15% of his counterpart in the US, which clearly allows India to retain its position as a top
outsourcing destination. Further, despite the rapid growth over the past two decades, India's
market share in global IT services stands at just 7%, leaving ample room for growth.
Source: Company, Networth Research
50.9 51 50.3
50.5
50.3
53.2
53.6 53 53.2
53.2
52.7
48.7
47.8
49.1 49 49.7
49.5
49.7
46.8
46.4 47 46.8
46.8
47.3
51.3
52.2
0
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100
Q1
FY11
Q2
FY11
Q3
FY11
Q4
FY11
Q1
FY12
Q2
FY12
Q3
FY12
Q4
FY12
Q1
FY13
Q2
FY13
Q3
FY13
Q4
FY13
Q1
FY14
Time & Material Fixed Price & Time
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 4
Newer services lines – can be offshored
TCS has the most complete set of services offerings within its peers. If we look at the services
mix closely, then the newer services’ contribute about 40% of its revenues, significant portion
of it can be moved offshore. We are already seeing the trend as some of the earlier onsite
work is moved to offshore and the same has been growing at sequential quarter basis over
the last many quarters. TCS has been able to hold on to its pole position of the largest player
in its focus verticals even as competitors have gained market share. TCS has the largest pres-
ence in key verticals like BFSI, manufacturing as well as in emerging verticals like life sci-
ences. It is the second largest vendor in other verticals like telecom, retail and transportation.
Thus it has spread its revenues across verticals, which can be captured from the subsequent
table.
At the end of June 2013, TCS boasted of one of the strongest deal pipelines in the IT sector.
The order backlog included 53 clients in the greater than US$ 50 m category and 19 clients in
the greater than US$ 100 m category. Further, TCS grew the clients in those buckets by
60.6% and 90% respectively between June 2011 and June 2013. A comparative study of the
deal pipelines among TCS, Infosys and Wipro between June 2011 and June 2013 reveals that
TCS enjoyed the highest growth across all client brackets (Wipro's growth in the greater than
US$ 100 m category is an exception). The Latest management comments indicate that TCS is
expecting discretionary projects and overall client spends to revive in the US. Besides, the
European clients are also interested in awarding large deals based on traditional service offer-
ings
TCS Infosys Wipro
US$ 1mn+ clients 38.9% 24.6% 12.3%
US$ 5mn+ clients 41.1% 17.5% 11.8%
US$ 10mn+ clients 45.9% 11.2% 12.7%
US$ 20mn+ clients 36.3% 2.5% 10.1%
US$ 50mn+ clients 60.6% 28.1% 12.5%
US$ 100mn+ clients 90.0% 36.4% 150.0%
Source: Company, Networth Research
Segment Q1
FY11 Q2
FY11 Q3
FY11 Q4
FY11 Q1
FY12 Q2
FY12 Q3
FY12 Q4
FY12 Q1
FY13 Q2
FY13 Q3
FY13 Q4
FY13 Q1
FY14
IT Solutions and Services
ADM (Appl. Dev. Magt) 47.9 46.8 45 46.1 46.2 44.7 44 44.4 43.4 43.1 42.4 42.4 42.3
Enterprise Solutions 15.2 15.9 14.9 15.7 15.7 15.8 15.9 15.2 15.2 14.9 15.1 15.5 15.1
Assurance Services 6.4 6.6 7.1 7 7.3 7.6 7.6 7.3 7.6 7.7 7.7 7.8 8.1
Others Service lines
Engineering & Industrial Services 4.8 4.9 4.8 4.8 4.6 4.8 4.5 4.6 4.6 4.6 4.7 4.6 4.7
Infrastructure Services 8.7 9.4 10.5 9.1 9.5 9.6 10.6 10.4 10.6 11.4 11.7 12.1 11.9
Global Consulting 2.1 2.1 2.3 2.1 2.2 2.6 2.8 2.7 2.8 3 3.2 3.1 3.5
Asset Leveraged Solutions 3.7 3.4 4 3.6 3.6 4 3.8 3.9 2.8 2.7 2.8 2.5 2.5
Business Process Services 11.2 10.9 11.4 11.6 10.9 10.9 10.8 11.5 13 12.6 12.4 12 11.9
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 5
TCS vs Infosys
Infosys is one the nearest competitor of TCS. Both these companies accounts for more than
15% of the total revenue of Indian IT companies. A brief overview of both the company’s is
reflected below:
Revenue Growth
Source: Company, Networth Research
Source: Company, Networth Research
Headcounts & Attriction Rate
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Q2
FY11
Q3
FY11
Q4
FY11
Q1
FY12
Q2
FY12
Q3
FY12
Q4
FY12
Q1
FY13
Q2
FY13
Q3
FY13
Q4
FY13
Q1
FY14
TCS Infosys
5%
7%
9%
11%
13%
15%
-
50,000
100,000
150,000
200,000
250,000
300,000
Q1
FY11
Q2
FY11
Q3
FY11
Q4
FY11
Q1
FY12
Q2
FY12
Q3
FY12
Q4
FY12
Q1
FY13
Q2
FY13
Q3
FY13
Q4
FY13
Q1
FY14
Headcount (LHS) & Attrition (RHS)
TCS Infosys TCS Infosys
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 6
Client Metrics (nos)
Outlook & Valuation
We initiate coverage on TCS with a Neutral rating and set a 12– month target price of Rs.2100 (valuing the company at 22x at its FY15E EPS). The key reason for our neutral rating is up-side is priced-in and we believe USD/INR prices are bottoming. However, we are optimistic on TCS’s market opportunity and competitive positioning, we believe the TCS offer limited upside in near term given current valuation. At CMP TCS currently trades at price to earning multiple of 21.9x at its FY15E EPS of Rs.95.5, which reflects a significant premium vs other large cap IT companies. TCS has indicated that client spending trends will continue to remain positive on the back of pick up in discretionary spending across US and Europe with European clients continuing to focus on cost optimizing measures. We believe the company to maintain its current operating margins and expect to reinvest most of the currency gain back in the business. Further the large size of the addressable global market, with relatively low current level of penetration im-plies significant headroom for future growth.TCS has positioned itself well for the growth in business with an aligned strategy, structure and capabilities. On the macro level the economic slowdown in the US and Europe has eased, but uncertainty remains. The US economy has started improving; but growth is still tad low. Further, the on-
going issues of debt ceiling still remains headwinds Also Business models like cloud comput-
ing and other pay-for-use models are beginning to gain traction in most industries.
Source: Company, Networth Research
0
5
10
15
20
25
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35
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FY10 FY11 FY12 FY13
TCS Infosys HCL Tech Wipro
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 7
Source: Company, Networth Research
Source: Company, Networth Research
Improvement in EBIT margins in
FY14E is expected primarily due
to rupee depreciation.
Revenue growth in FY15E may fall
down to 11% as we expect pricing
pressure may continue and expects
rupee to appreciate
Source: Company, Networth Research
Trend in Revenue growth
Revenue INR Cr
Trend in EBIT Margin
EBIT INR Cr
Cash Flow from Operations
(INR cr)
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
FY11 FY12 FY13 FY14E FY15E
Cash Flow from Operations growth
26.0%
26.5%
27.0%
27.5%
28.0%
28.5%
-
5,000
10,000
15,000
20,000
25,000
30,000
FY11 FY12 FY13 FY14E FY15E
EBIT EBIT Margin
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
FY11 FY12 FY13 FY14E FY15E
Revenue Revenue growth
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 8
Source: Company, Networth Research
Geography Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14
America
North America 53.4 53.3 53.6 53.5 52.8 52.6 52.1 54.1
Latin America 3 3.1 3.1 3.3 3.4 3.3 3.5 2.4
Europe
UK 15.5 15 15.2 17 17.1 17.5 16.8 17
Continental Europe 10.1 10.5 9.8 9.6 9.5 9.4 9.4 9.9
India 8.3 8.4 8.5 7.1 7.5 7.6 8.8 7.6
Asia Pacific 7.5 7.6 7.7 7.4 7.6 7.5 7.3 6.9
MEA 2.2 2.1 2.1 2.1 2.1 2.1 2.1 2.1
Vertical Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14
BFSI 43.5 43.3 42.2 43 42.8 43 43.5 43
Telecom 10.7 10 10 10.3 10.3 9.5 9.3 9.6
Retail & Distribution 12.1 12.3 12.5 13.2 13.4 13.4 13.4 14
Maufacturing 7.8 7.8 7.9 7.9 8.2 8.5 8.5 8.4
Hi-Tech 5.9 5.9 6 6 5.9 5.8 5.7 5.5
Life Science & Healthcare 5.3 5.3 5.3 5.3 5.2 5.2 5.1 5.5
Travel & Hospitality 3.8 3.8 3.7 3.7 3.6 3.6 3.4 3.4
Energy & Utilities 4.3 4.1 3.8 3.6 3.6 3.8 3.8 3.7
Media & Entertainment 2.1 2.2 2.2 2.2 2.2 2.1 2.1 2.1
Others 4.5 5.3 6.4 4.8 4.8 5.1 5.2 4.8
Clients Contributions Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14
US$ 1mn+ clients 495 512 522 527 538 551 638 657
US$ 5mn+ clients 230 235 245 259 269 273 290 309
US$ 10mn+ clients 155 161 170 175 182 185 211 216
US$ 20mn+ clients 94 95 99 105 108 114 121 124
US$ 50mn+ clients 36 39 43 46 45 47 52 53
US$ 100mn+ clients 12 14 14 14 14 16 17 19
Utilization Rate Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14
Including Trainees 76.4 74 71.3 72.3 72.8 72.1 72.2 72.5
Excluding Trainees 83.1 82 80.6 81.3 81.6 81.7 82 82.7
Operational Metrics
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 9
Industry Outlook
Re-shoring of IT services: Clients are now getting into the phase of 2nd generation outsourc-
ing. This means that they are looking at more than one vendor to manage their outsourcing work. This has considerably increased the addressable market. We believe that companies like TCS, with their wide service offerings and execution capabilities, will emerge as winners on the back of economic benefits that they provide. There are concerns with regard to re-shoring of IT services related work particularly in the US, given the current political climate. However, the cost advantages are still significant. For example, an 'entry level' engineer in India still costs less than 15% of his counterpart in the US, which clearly allows India to retain its position as a top outsourcing destination. Further, despite the rapid growth over the past two decades, India's market share in global IT services stands at just 7%, leaving ample room for growth.
Labour arbitrage: Labour arbitrage has been the competitive edge of the Indian software sec-
tor over the last few years. However, this seems to be threatened now by MNCs’ who are rep-licating the Indian outsourcing model and setting up bases in the country. Going forward, the advantage of low employee costs could peter out and the sector could get commoditized.
Forex Volatility: In our view exchange rates remain a significant factor in analyzing growth in
any single currency. Movement in the dollar relative to other currencies complicates the inter-pretation of forecasts and can distort spending comparisons between regions that use differ-ent currencies
Liquidity not a challenge: The liquidity position of IT services in 2013 will be comfortable,
backed by their huge cash flow, low debt levels and positive free cash flow from recurring and
critical nature of IT services. However demand contraction due to double dip recession or any
increase in M&A activity, large dividend, shares buyback and expansion in receivable days will
be the key risks to liquidity.
Outlook:
With some pick-up in US and stability in Europe, demand is likely to improve going ahead. The decision-making cycle seems to be improving also revenue growth should see some pick-up in coming quarters. The worldwide spending on technology and related services in 2012 was USD 1.9 trillion2, a growth of 4.8% over 2011. Spend on IT, BPO and software products, continued to have the majority share of 58% of total IT spend, standing at USD 1 trillion. While banking, financial services & insurance (BFSI) and manufacturing remained the largest verti-cals in terms of total share in IT spending, emerging verticals such as healthcare, retail, gov-ernment and utilities were the drivers of incremental growth in 2012. The worldwide IT out-sourcing (ITO) market is forecast to reach $288 billion in 2013, a 2.8 percent increase in U.S. dollars (and 5.1 percent in constant currency*) from 2012, according to Gartner, Inc. Com-pared with Gartner's previous forecast, nearly all ITO segments are now forecast to grow more slowly during 2013. During Q2 FY14, we expect 2-5 percent qoq constant currency for large cap IT companies, we believe currency volatility will boost the margins across the board and also it would help the companies to mitigate the hike in wages which will increase the EBIT margins or remain sta-ble. While US Immigration bill continues to be an overhang, we believe this is the event risk for the sector but the noise has definitely subsided.
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 10
Concerns
Forex Volatility
The Indian rupee has been very volatile against USD over the past few months (See graph).
The exchange rate movement is beyond the control of the companies. Volatility in forex in-
creases the volatility in revenues of the Indian IT services, as 80 percent of the billing of the IT
companies are in foreign currency. Also the volatility in currency also does not give any scope
for the IT companies to make any kind of planned move. With around 90% of TCS’s billing in
foreign currency, Rupee’s volatility is a huge risk for the company.
Highly dependent on BFSI vertical
Among the top five Indian IT companies, TCS has highest exposure in BFSI vertical. Around
43% of the total revenue of TCS is generated from this vertical; this high exposure in BFSI
increases the risk of taking a hit if the vertical underperform as there is lot of ongoing troubles
in the vertical post 2008 crisis. However, TCS has maintained the contribution of BFSI de-
spite of global financial crisis was at a high. Further, during Q1 FY14 out of 10 large deals,
two of them were in the BFSI vertical. Management has also indicated that banking clients
are focusing on cost reduction and we believe TCS has all the capability to provide them with
their experience.
Global Slowdown
There is an uncertainty in the whole global economic environment, especially in the devel-
oped countries like US and Europe, which contributes more than 75% percent of the revenue
of the Indian IT sector. Thus, if situation worsen in these regions, the growth prospect of the
company may get adversely impacted.
Source: Bloomberg
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USD vs INR
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 11
As compared to large Cap IT companies TCS is trading at a premium, At CMP TCS currently
trades at price to earning multiple of 21.9x at its FY15E EPS of Rs.95.5, which reflects a significant
premium vs other large cap IT companies., as other large IT companies trade in the range of 14-
18x, which indicates TCS is trading at a premium to its peer group. We believe TCS to maintain its
leadership position over the next two years, backed by a strong and satisfied client base.
Source: Networth Research
Peer Comparison
TECH MAHINDRA, 11.5
Wipro, 16.5
HCL TECH, 15.1
Infosys, 16.8
Cognizant, 19.0
TCS, 22.8
0.0
5.0
10.0
15.0
20.0
25.0
P/E
Source: Networth Research
Particulars TCS Infosys HCL Tech Wipro Tech Mahindra
CMP (closing on 7th Oct) 2,089 3,021 1,119 482 1,443
Market Cap (INR BN) 3,980 1,732 765 1,190 326
EV (INR Cr) 3,852,839 1,530,036 728,829 1,091,851 333,306
No. of Shares o/s (no.) 1,957 571 697 2,463 128
PE (x) 23.5 16.0 15.4 16.5 11.8
FY14E EPS 88.8 189.0 72.6 29.3 122.1
TTM EPS (INR) 73.9 166.4 59.0 26.6 100.9
5 year Avg PE (x) 20.3 20.4 15.2 18.3 10.0
ROE (%) 36.89 23.44 31.29 22.71 32.60
5 year Avg ROE (%) 40.13 30.05 27.33 25.29 34.56
Payout Ratio (%) 30.98 25.58 20.40 28.11 4.98
Div Yield (%) 1.37 1.68 1.30 1.64 0.49
OPM (%) 26.93 25.88 20.25 17.51 18.23
Net Profit Margin (%) 22.09 23.37 15.93 17.73 18.74
Revenue (INR mn) 629,895 403,520 257,337 374,256 68,731
Net Income (INR mn) 139,173 94,290 40,989 66,359 12,878
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 12
Source: Company, Networth Research
Nifty vs NSE IT vs TCS
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r-1
3
13
-May
-13
27
-May
-13
10
-Ju
n-1
3
24
-Ju
n-1
3
8-J
ul-
13
22
-Ju
l-1
3
5-A
ug-
13
19
-Au
g-1
3
2-S
ep
-13
16
-Se
p-1
3
30
-Se
p-1
3
CNX IT TCS
80
90
100
110
120
130
140
150
160
170
1-O
ct-1
2
15
-Oct
-12
29
-Oct
-12
12
-No
v-1
2
26
-No
v-1
2
10
-De
c-1
2
24
-De
c-1
2
7-J
an-1
3
21
-Jan
-13
4-F
eb
-13
18
-Fe
b-1
3
4-M
ar-1
3
18
-Mar
-13
1-A
pr-
13
15
-Ap
r-1
3
29
-Ap
r-1
3
13
-May
-13
27
-May
-13
10
-Ju
n-1
3
24
-Ju
n-1
3
8-J
ul-
13
22
-Ju
l-1
3
5-A
ug-
13
19
-Au
g-1
3
2-S
ep
-13
16
-Se
p-1
3
30
-Se
p-1
3
TCS Nifty
Source: Company, Networth Research
The stock has outperformed the market in past one year. CNX IT has given the return
of 27% in past 12 months while TCS has given the return of 49% in last one year and
the benchmark Nifty has gained only 1.1% in the same period. While the lack of a fea-
sible investment option in a slowing economy and the benefit of weaker home cur-
rency to export oriented companies has helped the stock vault in a short period, the
sharp jump raises concerns whether it would be able to sustain and add to its gains
further in the near term.
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 13
Financial Summary
Source: Company, Networth Research
Particulars 2011A 2012A 2013A 2014E 2015E
Sources Of Funds
Shareholders Funds
Share Capital 296 296 296 296 296
Share Application Money - - - - -
Reserves & Surplus 24,209 29,284 38,350 49,589 61,738
Total Shareholders Fund 24,505 29,579 38,646 49,885 62,034
Minority Interest 458 559 695 695 695
Long Term Borrowings 38 115 131 170 187
Deffered Tax Liability 109 173 235 235 235
Total loans 363 618 848 1,099 1,208
Total Liabilities 25,435 30,929 40,424 51,915 64,172
Application Of Funds
Fixed Assets
Gross Block 7,792 9,448 11,623 15,045 18,805
Less: Depreciation 3,545 4,329 5,376 6,945 9,051
Net Block 4,247 5,119 6,247 8,100 9,754
Capital WIP 1,194 1,446 1,895 1,895 1,895
Investments 1,079 578 968 2,449 2,691
Deffered Tax Assets 160 256 310 310 310
Current Assets
Investories 23 18 21 82 90
Sundry Debtors 8,195 11,520 14,077 19,013 21,136
Cash And Bank balance 4,701 6,003 6,769 8,947 16,326
Other Current Assets 2,151 3,478 4,888 4,899 5,831
Loans & Advances 1,967 2,255 5,821 8,164 8,971
Total Current Assets 17,036 23,275 31,577 41,104 52,353
Less: Current Liabilities - - - - -
Current Liabilities 4,527 5,671 7,609 8,981 9,868
Provisions 2,719 4,794 4,233 4,233 4,233
Total Current Liabilities 7,246 10,465 11,843 13,214 14,101
Net Current Assets 9,790 12,810 19,734 27,890 38,252
Total Assets 25,435 30,929 40,424 51,915 64,172
Consolidated Balance Sheet INR Cr
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 14
Source: Company, Networth Research
Source: Company, Networth Research
Particulars 2011A 2012A 2013A 2014E 2015E
Income from Operations 37,325 48,894 62,989 81,643 89,705
growth 31.0% 28.8% 29.6% 9.9%
Total Expenditure 26,146 34,459 44,950 56,981 62,550
EBITDA 11,178 14,435 18,040 24,662 27,155
EBITDA Margin 29.9% 29.5% 28.6% 30.2% 30.3%
Depreciation 735 918 1,080 1,569 2,106
EBIT 10,443 13,517 16,960 23,093 25,049
Interest 26 22 48 121 133
Other Income 604 428 1,178 1,380 1,412
PBT 11,021 13,923 18,090 24,352 26,329
Tax 1,831 3,400 4,014 6,768 7,322
PAT 9,068 10,413 13,917 17,291 18,691
PAT Margin 24.3% 21.3% 22.1% 21.2% 20.8%
Consolidated P&L INR CR
Particulars 2011A 2012A 2013A 2014E 2015E
PAT 9,068 10,413 13,917 17,291 18,691
Depreciation 735 918 1,080 1,569 2,106
Non-Cash Adjustments -999 -1,260 -1,693 - -
Change in working capital -2,190 -3,063 -1,689 -5,978 -2,983
Cash Flow from operation 6,614 7,008 11,615 12,881 17,814
Capital Expenditure -1,827 -2,007 -2,640 -3,422 -3,760
Change in Investment (Dec)/inc 2,002 447 -520 -1,481 -242
Other investing cash flows -1,637 -1,168 -2,925 - -
Cash Flow used in investing -1,462 -2,727 -6,086 -4,903 -4,002
Issue of equity' - - - - -
Issue/Repay Debt -4 -1 -3 251 109
Dividend paid -4,584 -3,880 -5,703 -6,052 -6,542
Other financing cash flows -70 -74 -23 - -
Cash Flow from Financing -4,659 -3,955 -5,729 -5,801 -6,433
Net Cash 494 326 -200 2,178 7,379
Adjustment of Exchange rate 30 119 48 - -
Opening Balance 1,024 1,549 1,993 1,841 4,019
Closing Balance 1,549 1,993 1,841 4,019 11,398
Cash Flow Statement (INR in Cr)
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 15
Source: Company, Networth Research
Source: Company, Networth Research
Particulars 2011A 2012A 2013A 2014E 2015E
Revenues (INR Cr) 37,325 48,894 62,989 81,643 89,705
EBITDA (INR Cr) 11,178 14,435 18,040 24,662 27,155
Net profit (INR Cr) 9,068 10,413 13,917 17,291 18,691
Capital Employed (INR Cr) 25,435 30,929 40,424 51,915 64,172
Market Cap(INR Cr) 355,236 355,236 355,236 355,236 355,236
Market Cap/Sales, x 9.5 7.3 5.6 4.4 4.0
Gross Block (INR Cr) 7,792 9,448 11,623 15,045 18,805
EPS, Rs 46.33 53.21 71.11 88.34 95.50
CEPS, Rs 50 58 77 96 106
BVPS, Rs 125.2 151.1 197.5 254.9 316.9
P/E, x 39.2 34.1 25.5 20.5 19.0
P/BV, x 14.5 12.0 9.2 7.1 5.7
EV/EBITDA, x 31.7 24.5 19.6 14.4 13.0
EV/Sales, x 9.5 7.2 5.6 4.3 3.9
Valuation Summary
Particulars 2011A 2012A 2013A 2014E 2015E
EBIDTA % 29.9% 29.5% 28.6% 30.2% 30.3%
PAT % 24.3% 21.3% 22.1% 21.2% 20.8%
ROE % 37.0% 35.2% 36.0% 34.7% 30.1%
ROCE % 41.1% 43.7% 42.0% 44.5% 39.0%
ROA % 35.7% 33.7% 34.4% 33.3% 29.1%
Growth Ratios (%)
Income growth 280.9% 31.0% 28.8% 29.6% 9.9%
EBITDA growth 567.4% 29.1% 25.0% 36.7% 10.1%
PAT growth 689.9% 14.8% 33.6% 24.2% 8.1%
Turnover Ratios
Fixed Asset Turnover x 4.8 5.2 5.4 5.4 4.8
Creditors Days 46.7 34.4 36.1 37.0 37.0
Debtors Days 80.1 86.0 81.6 85.0 86.0
Ratios
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 16
Share Holding Pattern
Source: BSE
Management Profile
Mr N. Chandrasekaran is the Chief Executive Officer (CEO) of TCS. He took over as CEO in October 2009. Prior to this position, he was the Chief Operating Officer and Executive Di-rector. He joined TCS in 1987 and has over 20 years of experience in the software industry and business operations. He has a Bachelor's degree in Applied Sciences and a Master's De-gree in Computer Applications. In April 2006, he was named by Consulting Magazine, US, as one of the top 25 most influential consultants in the world.
Mr Rajesh Gopinathan, Chief Financial Officer (CFO), joined TCS from Tata Industries and
initially worked to drive TCS's newly established e-business unit in the United States. He was
appointed as the CFO in February, 2013 and steps into the shoes of the legend, Mr S. Mahal-
ingam who recently relinquished the post. Rajesh Gopinathan holds an Electronic Engineering
degree from REC Trichy and a Post Graduate Diploma in Management from IIM, Ahmedabad.
Shareholders having more than 1%
Source: BSE
Company Profile
Currently, TCS is the largest firm in India providing IT services and solutions to a diverse set of global and regional clients through its 105 global delivery centers in 44 countries with a headcount of ~276,000 employees. It derives majority of the revenues (~56%) from US region followed by Europe (~27%) and Rest of the World (~17%). TCS clocked revenues of ~INR630bn in FY13 with EBIDTA of INR180bn and EPS of INR71. It marked revenues of 48% and 52% from Time &Material and fixed price contracts respectively. Revenues from offshore and onshore operations were registered at 51% and 44%, respectively.
The company derives ~75% of its revenue from banking, insurance, manufacturing, retail and telecom verticals with the balance from energy & utilities, transportation, healthcare and oth-ers. Its vast service portfolio comprises application development and maintenance, business process management, consulting, infrastructure management, product engineering, system integration and testing services. Company’s contract portfolio consists of both fixed price and time & money contracts, with increasing contribution from fixed price contracts over the past few quarters. The company has emerged as a pioneer in IT services industry and stands among top ten IT companies in the World.
Name of the shareholders No. of Shares held Shares as % of Total No. of Shares
Life insurance corporation of India 55,568,386 2.8%
Franklin Templeton Investment Funds 30,818,141 1.6%
Promoter Holding
74%
MFs and DII's
Holding
6%
FII's16%
Others and
Public
4%
Shareholding Pattern
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 17
News & Events in last one month
TCS has set up a digital enterprise unit in Silicon Valley to club its social, mobil-
ity, analytics and cloud (SMAC) computing technology services under a single roof. a
move that may help it become the first Indian company to exceed $100 billion in
market capitalization (Oct 2013)
Goa picks TCS for criminal tracking projectL : TCS has bagged a five-year e-
governance deal to electronically link up all police stations and provide real-time
crime and criminal information in Goa. (Sep 2013)
TCS edges out rivals to bag Rs 193-cr deal from I-T Dept Tata Consultancy Ser-
vices has pipped Infosys and Wipro to bag a Rs 193 crore contract for setting up and
managing a new software platform for the Income Tax Department, it is reliably
learned. As part of the six-year contract, TCS will setup a new platform-the Income
Tax Business Application (ITBA). While the platform will be ready in 12 months, the
Tata group company will manage the project operations for five years. (Sep 2013)
TCS bags project from Macau telecom firm: In the month of Sep 2013 TCS has
been selected to deploy a new rating and billing system for CTM, a telecom service
provider in Macau. The solution, which is to be deployed in three years, will allow
CTM's customers to receive faster response to enquiries and enable them to better
manage their services and bills, according to a press statement. (Sep 2013)
TCS wins Nordic outsourcing deal: During 1st week of September 2013 TCS has
won an outsourcing deal from DNB, Norway's largest financial services group, to
render application maintenance and development services for six years. TCS will
operate across DNB's channels and IT portfolio as part of the managed services
contract. Financial details of the deal were not disclosed. In the Nordic region, TCS
employs over 5,500 professionals (Sep 2013)
TCS bags deal from Saudi Arabia: TCS have bagged a deal to implement its core
banking platform at Saudi Arabia's National Commercial Bank. International media
reports suggest that the contract, which is valid for two years, is part of the Jeddah-
based institutions' strategy to develop electronic services and provide technology-
based banking solutions. (Sep 2013)
TCS selected for Rs 200-crore I-T project As part of its latest technology upgrade
exercise, the income-tax (I-T) department has selected TCS to implement an I-T up-
grade project worth Rs 200 crore. The five-year project involves upgrading the entire
hardware and software of all the I-T department offices across the country. (Sep
2013)
Initiating Coverage Networth Research is also available on Bloomberg and Thomson 18
Networth Research: E-mail- [email protected]
Research Analyst : Vikas Jain
Land Line : 022-30641653
Key to NETWORTH Investment Rankings
Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by -5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15
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