Tata Consultancy Services

Transcription

1 4QFY15 Result Update Institutional Equities Tata Consultancy Services Reuters: TCS.BO; Bloomberg: TCS IN 17 April 215 Standalone P/E to crunch; P/E premium will depend on peers Tata Consultancy Services (TCS) 4QFY15 numbers were disappointing. The biggest negative surprise was on the revenue front where on a constant currency (CC) basis revenue growth at 1.6% in USD terms came in lower than our and consensus expectation as well as the mid quarter guidance of ~2.5%. TCS has indicated an aspiration to grow above NASSCOM s growth estimate for FY16 of 12-14%. It does not want to call it guidance. This aspiration looks fairly ambitious considering FY16 looks challenging for a few verticals - Oil & gas, Insurance and Telecom (as per TCS). It started FY15 with no such headwinds and was able to deliver CC organic growth of 15%. Unless these sectors take a turn for the better, we think achieving its aspiration will be a tall order. The big positive surprise in INR EBIT margin (QoQ up from 27% to 27.2% vs our expectation of decline to 26.5%) was driven entirely by lower SGA (9bps decline). While some of the decline in SGA is likely currency related we also believe that there has been a cut back in investments not a positive sign for growth going ahead. We believe SGA would be pared going ahead as TCS would want to calibrate it depending on head room that is available. We don t think there will be much headroom in FY16 considering the steep salary hike given to offshore and onsite employees (8% and 3% on an average respectively). The net hiring number (~1) is a multi- year low and is worrisome in the context of its (1) very high utilization number (~85% excl trainees) (2) its multi year high attrition of 14.9% in 4Q and (3) its aspiration to grow above Nasscom growth target of 12-14% for FY16. P/E premium to industry to be determined by peer s performance: With what has been clearly a disappointing set of numbers, we expect the standalone P/E multiple of TCS company to contract further from current levels and move towards our target P/E multiple of of 18.1x. TCS s P/E premium to its peers has narrowed to 1%-15% versus the 3%-35% that it used to trade in its best phase in 214. We think this lower premium reflects the market s perception that the growth rate gap between peers and TCS will narrow sharply in FY16 and beyond. Where the discount will settle at (we still think it will be a discount as we currently think that TCS will continue to be one of the fastest growing companies in the foreseeable future among the India Tier-1 set) will entirely depend on what peers s outlook on growth for FY16 is and what they deliver in terms of March 215 quarter numbers.. View on Stock and estimates: We maintain Sell on TCS with a revised Target price of Rs2,325.There have been some modest revisions to our EPS estimates. Our negative thesis on the sector and TCS is reflected in our report Structural and Cyclical Speed Breakers ahead which is available here (Information Technology Sector). SELL Sector: Information Technology CMP: Rs2,574 Target Price: Rs2,325 Downside: 1% Girish Pai girish.pai@nirmalbang.com Key Data Current Shares O/S (mn) 1,958.7 Mkt Cap (Rsbn/US$bn) 5,59/ Wk H / L (Rs) 2,84/1,969 Daily Vol. (3M NSE Avg.) 1,323,96 Price Performance 1 M 6 M 1 Yr TCS.4 (.9) 26.8 Nifty Index (.2) Source: Bloomberg Y/E March (Rsmn) 4QFY14 3QFY15 4QFY15 YoY QoQ Net sales 215, ,11 242, (1.1) Software expenses 114,64 135, , % of sales Operating expenses 38,61 43,611 41, 7.7 (6.) % of sales (73) (87) EBIT 62,81 66,242 65, (.5) EBIT Margin (193)bps 18bp Other Income 6,99 6,295 11, PBT 69,8 72,537 77, Provision for tax 16,313 17,453 17, Effective tax rate Minority share in profit / loss (25.2) (39.5) PAT (reported) 52,967 54,441 59, NPM (19)bps 216bps Please refer to the disclaimer towards the end of the document.

2 Exhibit 1: Key financials Y/E March (Rsmn) FY14 FY15 FY16E FY17E FY18E Revenue ,52 1,184 1,316 YoY EBIT EBIT Adj. PAT YoY FDEPS (Rs) RoE RoCE ROIC P/E (x) P/B (x) Exhibit 2: Change in estimates New Old Change FY16E FY17E FY16E FY17E FY16E FY17E INR/USD US$ Revenue 17,175 18,788 17,443 19,81 (1.5) (1.5) Revenue (Rsmn) 1,52 1,184 1,64 1,22 (1.1) (1.5) EBIT (Rsmn) (.9) (2.7) PAT (Rsmn) (.2) (.9) EPS (Rs) (.) (1.) Analyst call Highlights The CC revenue growth of 1.6% qoq can be broken down into 3 components volume growth of 1.42%, positive price realization impact of.79% and negative offshore shift impact of.6%. In FY15, the revenues grew 17% in cc terms and 15.7% in INR terms YoY. The entire 17% revenue growth was driven by volumes. The company has rolled out a new employee cash reward program as a bonus payout to all its employees for completing its 1 years since the launch of IPO in 25. It is a one-time payout of Rs.26.28bn. Among industry verticals, it faced headwinds in 3 segments Energy & Utilities, Telecom, and Insurance (exclusively due to Diligenta). Revenues de-grew by 6.2% qoq in Telecom and 4.7% in Energy & Utilities. Insurance segment is facing headwinds largely due to Diligenta. Excluding Diligenta, Insurance segment has grown yoy, whereas, Diligenta has de-grown. Turn around in Diligenta is at least 2-3 quarters away according to the company. Apart from these 3 headwinds, all the other segments have shown a robust performance. TCS expects BFS business to do in-line or higher than company performance. TCS reported a net employee addition of 131 during the quarter, while the gross addition was employees, taking the total employee count to For FY16, the company is expecting to hire 6 employees out of which 35 would be campus hires. TCS reported attrition of 14.9%, which is the highest in the last 1 years. According to TCS, this is largely an industry phenomenon as there are a large number of growth opportunities and is indicative of the fact that there is strong demand for IT Services. But the management is focused to reduce this number. Among geographies, all regions have been able to register growth (qoq), except India which was almost flattish for the quarter. UK has registered a strong growth of 2.4%, despite being a headwind from Diligenta. Continental Europe has grown by more than 25% yoy. Among the service lines, Growth is led by infrastructure, followed by assurance, enterprise solutions and BPS. Digital and cloud has done extremely well. The company has crossed the $125mn revenue run-rate in some of its cloud based platforms.. TCS is launching a new Artificial Intelligence based Platform. It is a neuroscience based platform which will help in automating services. It is a self learning platform which will learn and streamline its processes with time. It will be mostly used in IT Services, BPS and IMS. According to the company, all the 5 pilot projects have been successful and well received by a number of clients. The company expects that there will be a slight uptick in the client budget for IT services expenditure in FY16 as compared to FY15 and the theme will be led increase in digital spending by the clients. 2 Tata Consultancy Services

3 Apr-12 1QFY14 Jun-12 Aug-12 2QFY14 Oct-12 Dec-12 Feb-13 3QFY14 Apr-13 Jun-13 4QFY14 Aug-13 Oct-13 Dec-13 1QFY15 Feb-14 Apr-14 2QFY15 Jun-14 Aug-14 3QFY15 Oct-14 Dec-14 Feb-15 4QFY15 Apr-15 Apr-12 Jun-12 1QFY14 Aug-12 Oct-12 2QFY14 Dec-12 Institutional Equities Feb-13 Apr-13 3QFY14 Jun-13 Aug-13 4QFY14 Oct-13 Dec-13 1QFY15 Feb-14 Apr-14 Jun-14 2QFY15 Aug-14 Oct-14 3QFY15 Dec-14 Feb-15 4QFY15 Apr-15 Exhibit 3: TCS three year P/E chart Why are we negative on TCS We expect slower US dollar (USD) revenue CAGR of 1% over FY15E-FY18E versus historical fiveyear/three-year (ending FY15) CAGR of 19.5%/15.7%, respectively and therefore believe that it should trade at lower multiples than it is doing currently on FY17 EPS. Our FY17 revenue/ebit/eps estimates are 5.3%/13.7%/1.2% below Bloomberg consensus estimates, respectively. Slower revenue growth for TCS largely stems from our concerns about growth detailed in the sector analysis (please read the sector report whose link is given in the first page of this note). Specifically with respect to TCS we are concerned about (1) its large size (among the largest volume players in the global IT services business currently) (2) its large exposure to the BFSI sector, which we believe will be weak in terms of growth over the forecasted period due to slower IT spend by its customers (3) its large exposure to legacy businesses which are likely to witness value/volume compression in an era of automation/frameworks and (4) lower market share gains because of convergence of capabilities/strategies of different players in the Tier-1 India player set. TCS has lost some P/E premium it used to command as the market perceived that the growth rate gap it enjoyed in FY14 and FY15 versus peers is likely to contract over FY15E-FY18E. Will still likely grow ahead of industry: Despite slower growth compared to its past, TCS will likely deliver industry leading revenue growth and margins in the foreseeable future because of its well-rounded business mix among Tier-1 set of peers (defined as India-listed companies with >US$5bn in revenue). It has the broadest range of capabilities - service line, vertical and delivery - in the peer set and these will still lead to consistent, broad-based growth across several quarters. TCS has invested in new growth drivers, which we believe will deliver over FY15E-FY18E. As investments start paying off, we believe it will maintain EBIT margin of around 25% and RoIC of > 5% over FY15E-FY18E. TCS has been good at both account hunting and mining with an impressive number of relationships not only added, but also scaled up. This has been possible because of the breadth of its capabilities and strong execution. Therefore while we believe the stock is overpriced, we have TCS as the P/E benchmark for the sector and have accorded it the highest Target P/E of 18.1x. All other companies have target P/Es that are at a discount to that of TCS. (Rs) 3, 2,5 (x) , 1, , Price P/E 3-yr mean 1sd -1sd Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 4: The dollar revenue growth has fallen steeply due to both growth slowdown and cross currency impact (1) (.8) (2) USD revenue growth (YoY) USD revenue growth (QoQ) 3 Tata Consultancy Services

4 1QFY14 2QFY14 3QFY14 4QFY13 4QFY14 1QFY14 Institutional Equities 1QFY15 2QFY14 3QFY14 2QFY15 4QFY14 3QFY15 1QFY15 2QFY15 4QFY15 3QFY15 4QFY15 Exhibit 5: Low SGA has led to EBIT margins come in higher than 27% despite a gross margin hit QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Gross margin SG&A as % of sales EBIT margin Exhibit 6: Net employee addition 12, 1, 9,751 8,326 8, 7,664 6, 5,463 4,967 4,868 4, 2, 1,39 1,31 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Exhibit 7: IMS continues to be the main driver of growth amongst service lines (INR terms) QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 IMS growth (YoY) BPM growth (YoY) ADM growth (YoY) Exhibit 9: Attrition is at a historic high Exhibit 8: Utilization is running high Utilization (excluding trainees) Attrition Source: Companies, Nirmal Bang Institutional Equities Research 4 Tata Consultancy Services

5 Exhibit 1: Key metrics 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Revenue (US$mn) 2,728 2,853 2,948 3,4 3,165 3,337 3,438 3,53 3,694 3,929 3,931 3,9 EBIT (US$mn) ,7 1,23 1, ,55 1,63 1,61 PAT (US$mn) P&L (Rsmn) Revenue 148, ,28 16, ,31 179,871 29, ,94 215, ,11 238, ,11 242,198 EBITDA 4,897 41,789 43,89 43,584 48,627 63,295 63,347 62,81 58,149 63,942 66,242 65,911 PAT 32,748 35,123 35,516 34,97 39,866 46,539 51,797 52,967 5,578 52,884 54,441 59,59 Vertical mix BFSI Manufacturing Telecom Life sciences Retail Energy and utility Horizontal mix Application development & maint Business Intelligence Product engineering services Enterprise solutions Infrastructure management Business process outsourcing Delivery Offshore Onsite Project type T&M Fixed price Staff utilisation (including trainees) Client concentration Top client Top 5 clients Top 1 clients Number of clients US$1mn US$5mn Employees 243, ,76 263, , , ,25 29,713 3,464 35, , , ,656 Attrition Tata Consultancy Services

6 Financials Exhibit 11: Income statement Y/E March (Rsbn) FY14 FY15 FY16E FY17E FY18E Average INR/USD Net sales (US$mn) 13,443 15,454 17,175 18,788 2,559 -Growth Net sales ,52 1,184 1,316 -Growth Direct costs Gross margin % of sales SG& A % of sales EBIT % of sales Other income (net) PBT PBT margin Provision for tax Effective tax rate Minority interest Net profit Growth Net profit margin Exhibit 13: Balance sheet Y/E March (Rsbn) FY14 FY15 FY16E FY17E FY18E Equity capital Reserves & surplus Net worth Minority interest Other liabilities Total loans Total liabilities Goodwill Net block (incl. CWIP) Investments Deferred tax asset - net Other non-current assets Other current assets Debtors Cash & bank balance Bank deposits Total current assets Total current liabilities Net current assets Total assets Exhibit 12: Cash flow Y/E March (Rsbn) FY14 FY15 FY16E FY17E FY18E EBIT (Inc.)/dec. in working capital (95) (2) (77) (79) (81) Cash flow from operations Other income (17) (13) (3) (37) (39) Depreciation & amortisation Financial expenses Tax paid (61) (67) (7) (77) (84) Dividends paid (55) (17) (133) (145) (165) Net cash from operations 25 3 (21) (26) (28) Capital expenditure (22) (12) (18) (17) (17) Net cash after capex 3 (9) (39) (44) (45) Inc./(dec.) in debt () (Inc.)/dec. in investments (14) Equity issue/(buyback) Cash from financial activities (15) Others 7 (5) Opening cash Closing cash Change in cash (4) 4 6 () Exhibit 14: Key ratios Y/E March FY14 FY15 FY16E FY17E FY18E EPS FDEPS Dividend per share Book value Dividend payout ratio (excl. DT) Return ratios RoE RoCE RoIC Turnover ratios Asset turnover ratio Debtor days (incl. unbilled rev.) Working capital cycle days Valuation ratios (x) PER P/BV EV/EBTDA EV/sales M-cap/sales Tata Consultancy Services

7 Rating track Date Rating Market price (Rs) Target price (Rs) 13 April 215 Sell 2,619 2, April 215 Sell 2,574 2,325 7 Tata Consultancy Services

8 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is published by Nirmal Bang s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication. Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited. NBEPL is in the process of making an application with SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, 214. NBEPL or its associates including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by Analyst. NBEPL or its associates/analyst has not received any compensation from the company covered by Analyst during the past twelve months. NBEPL /analyst has not served as an officer, director or employee of company covered by Analyst and has not been engaged in market-making activity of the company covered by Analyst. The views expressed are based solely on information available publicly and believed to be true. Investors are advised to independently evaluate the market conditions/risks involved before making any investment decision. Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /811, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /813, Umesh Bharadia Dealing Desk umesh.bharadia@nirmalbang.com Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 31/32, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai-413. Board No. : /1; Fax. : Tata Consultancy Services