Tata Consultancy Services (TCS) 2475

Transcription

1 Result Update Rating matrix Rating : Buy Target : 2750 Target Period : 12 months Potential Upside : 11% What s Changed? Target Changed from 2,600 to 2,750 EPS FY17E Unchanged EPS FY18E Introduced at 145 Rating Unchanged Quarterly Performance FY16 FY15 YoY (%) FY16 QoQ (%) Revenue 28,449 24, , EBIT 7,412 6, , EBIT (%) bps bps PAT 6,341 5, , Key Financials Crore FY15 FY16E FY17E FY18E Net Sales 94, , , ,502 EBITDA 27,294 30,860 33,324 37,473 Net Profit 21,696 24,023 25,617 28,573 EPS ( ) *FY15 recurring PAT Valuation summary FY15 FY16E FY17E FY18E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 487,617.3 Total Debt (March-16) ( Crore) Cash and equivalents (March-16) ( Crore) 29,517.5 EV ( Crore) 458, week H/L 2770 / 2115 Equity capital Face value 1 Price performance (%) 1M 3M 6M 12M TCS (4.5) (12.5) (8.3) (9.6) Infosys (1.5) (5.5) Wipro (2.5) (6.7) (0.7) (2.0) HCL Tech (3.8) (4.9) (12.1) 3.3 Research Analyst Abhishek Shindadkar abhishek.shindadkar@icicisecurities.com Tushar Wavhal tushar.wavhal@icicisecurities.com Steady but slow April 20, 2016 Tata Consultancy Services (TCS) 2475 FY16 witnessed steady quarterly earnings as growth was above our estimates but margins were below. US$ revenues grew 1.5% QoQ to $4,207 million vs. our 1.2% growth, $4,195 million estimate Constant currency revenues grew 2.1% QoQ led by volumes (3.2% QoQ) partially offset by a drop in realisations (~110 bps) At 26.1%, EBIT margins declined ~50 bps QoQ weighed by SG&A investments (-110 bps) partially offset by rupee tailwinds (+ 60 bps) but were below our 60 bps improvement and 27.2% estimate. PAT of 6,341 crore was in line with our 6,365 crore estimate TCS announced a final dividend of 27/share Introducing FY18E but maintaining FY17E estimates We introduce FY18E but continue to maintain our FY17E estimates. Dollar revenues could grow ~10% each in FY17E, FY18E translating to FY16-18E dollar revenue CAGR of 10%. We also expect rupee revenues, EPS to grow 11.7%, 11.5% YoY to 1,34,502 crore, 145, respectively. Margins could be under pressure in FY17E At 26.1%, EBIT margins declined 50 bps QoQ weighed down by increased SG&A expenses (down 110 bps) partially offset by rupee tailwind (60 bps) but were below our 60 bps improvement and 27.2% estimate. Though margins continue to be within the aspirational 26-28% band and demonstrate TCS superior execution capabilities, they could be under pressure in FY17E as TCS has applied for only one-third work visas relative to FY16 and intends to increase local hiring. Consequently, we maintain our 25.9% FY17E margin assumption (70 bps YoY decline) while those in FY18E could increase 20 bps YoY to 26.1%. Client mining encouraging Demand trends continue to be healthy as TCS has signed eight large deals spread across North America (two), Europe (one), UK (one) and rest in other major markets. Client transitions were also good as three client transitioned to $100 million+ bucket, five to US$ million, and 17 to $10-20 million. TCS has stopped disclosing utilisation rates and could hamper modelling assumption. gross hiring was 22,576 employees including 8,623 trainees and 10,659 laterals while net hiring was 9,152 employees. Though attrition declined 40 bps QoQ, it increased 60 bps YoY to 15.5% and continues to be at elevated levels. Deal signings continue to be healthy TCS has signed eight large deals in (nine in FY16, 13 in, nine in, nine in FY15, seven in and eight in ) spread across key verticals. Two deals each came from banking, insurance with one each from manufacturing, healthcare and media. Recall, the management had highlighted in FY16 that TCV of deals signed is 30% higher than its previous best. Steady but slowing; maintain BUY We estimate rupee revenue, PAT CAGR of 11.3%, 9.1% in FY16-18E (average 26% EBIT margins in FY16-18E), vs. 24%, 22.5% reported in FY11-16 (average 27.5% margins), respectively. Despite the management commentary of achieving strong growth in FY17E, we are maintaining our FY17E estimates given weak exit rates. We now value TCS at 19x FY18E EPS of 145 (20x FY17E EPS earlier) to arrive at our revised target price of 2,750 ( 2600). The lower multiple is to account for longer time horizon. ICICI Securities Ltd Retail Equity Research

2 Variance analysis FY16 FY16E FY15 YoY (%) FY16 QoQ (%) Comments Revenue 28,449 28,299 24, , Constant currency revenues grew 2.1% QoQ led by volumes (3.2%) offset by price realisation Employee expenses 15,707 15,331 13, , Gross Margin 12,741 12,968 11, , Gross margin (%) bps bps SG&A expenses 4,834 4,783 3, , EBITDA 7,907 8,186 7, , EBITDA Margin (%) bps bps Depreciation EBIT 7,412 7,705 6, , EBIT Margin (%) bps bps EBIT margins declined 50 bps QoQ weighed by increased SG&A expenses Other income (less interest) , PBT 8,317 8,375 7, , Tax paid 1,970 1,970 1, , PAT 6,341 6,365 5, , Reported PAT was in-line with our estimate Key Metrics Closing employees 353, , , , ,152 net heads were added sequentially Overall attrition (%) bps bps Attrition moderated QoQ but continues to be at elevated levels Utilisation incl trainees (%) bps 80.9 NM TCS has stopped disclosing utilisation rates Average $/ FY15 PAT not adjusted for one time employee bonus expense, Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 120, , ,502 Maintaining FY17E estimates EBIT 31,176 31, ,039 EBIT Margin (%) bps 26.1 PAT 25,543 25, ,573 EPS ( ) Assumptions Current Earlier FY15 FY16E FY17E FY18E FY17E FY18E Closing employees 319, , , , ,071 Overall attrition (%) Utilisation incl trainees (% Average $/ Comments Higher average wage hikes (~8-12% offshore, 2-6% onsite) could help contain rising attrition ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Key highlights: Commentary from earnings call Diligenta could stabilise in FY17E while LatAm recovery continues in (grew 1.8% QoQ on top of 13.3% in ). Japan continues to be in a wait and watch mode led by higher than anticipated delay in resolving integration related concerns. Ignio platform, AI-based automation product in software-as-aservice category, is seeing healthy traction. Total 16 new customers adopted Ignio since nine months of it launch Sequentially, digital business grew ~15% in dollar terms (4% in CC in, 10.7% in ) along with 180 bps improvement in contribution to 15.5% vs. 13.7% in Budget commentary from its customers continues be stable From a vertical perspective, BFS traction continues to be led by healthy deal wins. Insurance is bottoming out. Digital platforms continues to drive IT services spending in select verticals (retail, CPG, travel, BFS and partly insurance). TCS is participating in a big way in its client spends Operating metric highlights Operationally, growth was broad based across verticals, geographies and service lines. Among verticals, BFSI (40.9% of revenues, grew 3.2% QoQ in CC), manufacturing (10.4%, 3.9%), retail & distribution (14.1%, 2.1%), energy & utilities (4.1%, 3%), grew above company average while life sciences & healthcare (7.3%, 1.2%), telecom (8.3%, 1.3%) grew below. Smaller verticals travel (3.7%, 0.8%), and media (2.5%, 1.9%) reported modest growth. Geographically, North America (54%, 2.4%), Continental Europe (11.2%, 3.6%), MEA (2.4%, 9.5%), India (5.9%, 2.2%) grew above company average and were helped by APAC (9.4%, 1.1%), LatAm (2%, 1.8%), while UK (14.9%, -0.4%) was soft. Across services lines IMS (15.2% of revenues, grew 2.2% QoQ in CC), engineering services (4.7%, 5.8%), assurance services (8.8%, 4.5%), Asset leverage solutions (3.2%, 18.5%) led quarterly growth while ADM (39.4%, 1.2%), BPS (11.6%, 1.1%) grew below company average growth. Exhibit 1: Dollar revenues may grow at 10.1% CAGR in FY16-18E vs. 15.1% during FY11-16 $ million % FY10 FY11 FY12 FY13 FY14 Dollar revenues FY15 Growth, YoY FY16E FY17E FY188E ICICI Securities Ltd Retail Equity Research Page 3

4 Exhibit 2: TCS growth vs. Nasscom guidance FY17E could be below NASSCOM average FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E TCS dollar revenue growth NASSCOM guidance Deal signings continue to be healthy TCS has signed eight large deals in (nine in FY16, 13 in, nine in, nine in FY15, seven in and eight in ) spread across key verticals. Two deals each came from banking, insurance with one each from manufacturing, healthcare and media. Recall, the management had highlighted in FY16 that TCV of deals signed is 30% higher than its previous best. Margins continue to be in target band At 26.1%, EBIT margins declined 50 bps QoQ weighed by increased SG&A expenses (down 110 bps) partially offset by rupee tailwind (60 bps) but below our 60 bps improvement and 27.2% estimate. Though margins continue to be within the aspirational 26-28% band and demonstrate TCS superior execution capabilities, they could be under pressure in FY17E given TCS has applied for one-third work visas relative to FY16. This tends to increase local hiring. We maintain our 25.9% FY17E margin assumption, which implies 70 bps YoY decline while those in FY18E could increase 20 bps to 26.1%. Exhibit 3: We maintain 70 bps YoY decline; 25.9% FY17E margin assumption 32 % FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY188E EBIT Margin Client mining encouraging Demand trends continue to be healthy as TCS has signed eight large deals spread across North America (two), Europe (one), UK (one) and rest in other major markets. Client transitions were also good as three client transitioned to $100 million+ bucket, five to US$ million, and 17 to ICICI Securities Ltd Retail Equity Research Page 4

5 $10-20 million. TCS has stopped disclosing utilisation rates and could hamper modelling assumption. gross hiring was 22,576 employees including 8,623 trainees and 10,659 laterals while net hiring was 9,152 employees. Though attrition declined 40 bps QoQ, it increased 60 bps YoY to 15.5% and continues to be at elevated levels. Note, TCS added 382 accounts to the $1 million+ bucket during FY10-15, an increase of 1.9x while $1+, $5+, $10+, $20+, $50+ and $100+ million buckets saw a 2.5x, 3.1x, 3.2x, 3.8x, 3.8x and 5.0x growth in the number of clients to 804, 391, 268, 172, 69, 30 in FY16 vs. 322, 126, 85, 45, 18, 6 respectively, in FY08. Exhibit 4: $1 million+ revenue run-rate customers declined by 9 in FY FY09 FY10 FY11 FY12 FY13 FY14 FY15 $1 million+ clients Attrition moderates sequentially but still at elevated levels Though attrition declined 40 bps QoQ it increased 60 bps YoY to 15.5% and continues to be at elevated levels. Absolute attrition for FY16 was at ~56,000 and represents 16.8% jump on a YoY basis. Exhibit 5: TCS stops disclosing utilisation rates % FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY188E Utilisation (including trainees) ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 6: Attrition moderates but continues to be at elevated levels % FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY188E Overall attrition (%) [ ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook and valuation Tata Consultancy Services (TCS) reported steady quarterly FY16 earnings as growth was above our estimates while margins were below. Growth during the quarter was led by BFSI, manufacturing, retail, and lifesciences across verticals, North America, Continental Europe, India and LatAm among geographies and infrastructure management, engineering services and BPO among services. Enterprise Solutions and Consulting, Hi-tech and UK were weak. We estimate rupee revenue, PAT CAGR of 11.3%, 9.1% in FY16-18E (average 26% EBIT margins in FY16-18E), vs. 24%, 22.5% reported in FY11-16 (average 27.5% margins), respectively. Despite management commentary of achieving strong growth in FY17E, we are maintaining our FY17E estimates given weak exit rates. We now value TCS at 19x FY18E EPS of 145 (20x FY17E EPS earlier) to arrive at our revised target price of 2,750 ( 2600). The lower multiple is to account for longer time horizon. Exhibit 7: One year forward rolling PE Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Price Exhibit 8: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY15 94, FY16 108, FY17E 120, FY18E 134, ICICI Securities Ltd Retail Equity Research Page 7

8 Company snapshot 3,500 Target price : ,000 2,500 2,000 1,500 1, Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event Jul-11 TCS seeks alliances with companies in Japan to boost sales to $1 billion, an increase of 20-fold Dec-11 Call Genie Inc enters into five-year reseller agreement whereby TCS will resell the full suite of Call Genie and UpSnap Mobile products worldwide Feb-12 Europcar signs multi-year, multi-million euro contract with TCS to manage strategic IT services development for its French operations Jul-12 TCS guides to beat Nasscom guidance of 11-14% for FY13 on the back of higher outsourcing demand and volume growth Oct-12 To hire more workers in China to expand in Asia and reduce dependence on the Americas Feb-13 Nielsen extends its contract with TCS for three years Apr-13 TCS acquires Alti, an enterprise solutions provider, in France for 530 crore to boost its presence in Europe Oct-13 TCS climbs to record high after reporting a stellar FY14 with eight-quarter high dollar revenue growth and best ever operating margins of 30.2% Apr-14 TCS creates a strategic Japanese IT company with Mitsubishi Corporation after merging TCS Japan, ITF and NTSC. TCS to hold 51% in the combined entity Oct-14 TCS misses Street expectations though delivers yet another stable quarterly earnings. The Board approves merger of its subsidiary, CMC, with itself Dec-14 TCS guides for muted FY15E dollar revenue growth led by weak seasonality in BFSI, retail coupled with 220 bps cross currency headwinds Apr-15 The company delivers weak FY15 earnings led by cross currency headwinds. However, the company expects to better industry average growth during FY16E Jul-15 TCS company mixed set of FY16. While $ revenue growth was soft (3.5%) in a seasonally strong quarter, EBIT margins were above estimates despite wage hike Oct-15 The company delivers soft FY15 earnings. $ revenue growth was soft (3%) in a seasonally strong quarter while EBIT margins were in-line. Achieving industry Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Tata Group of Companies 31-Dec , Life Insurance Corporation of India 31-Dec The Vanguard Group, Inc. 29-Feb BlackRock Institutional Trust Company, N.A. 31-Mar Lazard Asset Management, L.L.C. 31-Mar Aberdeen Asset Management (Asia) Ltd. 29-Feb OppenheimerFunds, Inc. 29-Feb Capital Research Global Investors 31-Mar Stewart Investors 29-Feb JPMorgan Asset Management U.K. Limited 29-Feb Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Life Insurance Corporation of India 262.0m 7.1m Genesis Invst Management, LLP -73.8m -2.3m First State Investments (HK) Ltd. 34.9m 0.9m OppenheimerFunds, Inc m -2.0m Unigestion 30.3m 0.8m Tata Group of Companies -39.8m -1.1m T. Rowe Price Hong Kong Limited 17.7m 0.5m Stewart Investors -13.4m -0.4m Norges Bank Investment Management (NBIM) 16.3m 0.4m Franklin Advisers, Inc m -0.4m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16E FY17E FY18E Total operating Income 94, , , ,502 Growth (%) COGS (employee expenses) 51,240 59,219 66,408 74,029 S,G&A expenses 16,098 18,568 20,717 23,000 Total Operating Expenditure 67,338 77,787 87,126 97,029 EBITDA 27,294 30,860 33,324 37,473 Growth (%) Depreciation 1,870 1,956 2,180 2,434 Other Income less interest 3,140 2,825 2,779 2,753 PBT 28,564 31,729 33,923 37,792 Total Tax 6,656 7,456 8,006 8,919 Minority Interest Exceptional Item PAT before exceptional item 21,696 24,023 25,617 28,573 Growth (%) EPS ( ) PAT after exceptional item 19,648 24,023 25,617 28,573 EPS - Reported ( ) Cash flow statement Crore (Year-end March) FY15 FY16E FY17E FY18E Profit before Tax 28,564 31,729 33,923 37,792 Add: Depreciation 1,309 1,956 2,180 2,434 (Inc)/dec in Current Assets -2,658-4,210-3,944-4,307 Inc/(dec) in CL and Provisions 3,405 2,103 1,834 2,830 Taxes paid -7,482-7,456-8,006-8,919 CF from operating activities 19,369 21,296 23,208 27,077 (Inc)/dec in Investments -7,734-2,254-4,000-4,000 (Inc)/dec in Fixed Assets -6,055-6,043-6,400-6,800 Others 2,590 4,491 5,604 5,532 CF from investing activities -1,701-2,275-2,521-2,747 Inc/(dec) in loan funds Dividend paid & dividend tax -17,020-10,006-10,759-12,001 Others CF from financing activities -17,168-10,006-10,759-12,001 Net Cash flow 500 9,015 9,928 12,329 Exchange difference Opening Cash 6,769 18,556 27,571 37,499 Closing Cash 18,556 27,571 37,499 49,829 Balance sheet Crore (Year-end March) FY15 FY16E FY17E FY18E Liabilities Equity Capital Preference shares Reserve and Surplus 50,439 64,456 79,314 95,886 Total Shareholders funds 50,635 64,652 79,511 96,083 Total debt & provision 1,237 1,237 1,237 1,237 Minority Interest / Others 1,128 1,378 1,678 1,978 Total Liabilities 53,343 67,609 82,767 99,640 Assets Tangible assets 9,376 10,463 11,527 12,539 Intangible assets CWIP 2,766 2,766 2,766 2,766 Goodwill 2,093 2,116 2,139 2,160 Investments-Non current Inventory Debtors 20,438 23,461 26,009 29,044 Loans and Advances 4,146 4,760 5,277 5,892 Other Current Assets 5,657 6,225 7,101 7,755 Cash 18,556 27,571 37,499 49,829 Total Current Assets 91, , , ,457 Total Current Liabilities 35,989 42,739 46,676 51,339 Application of Funds 53,343 67,609 82,767 99,640 Key ratios (Year-end March) FY15 FY16E FY17E FY18E Per share data ( ) Adjusted EPS (Diluted) BV per share DPS Cash Per Share Operating Ratios (%) EBIT margins PBT Margins PAT Margin Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / Net Sales Market Cap / Sales Solvency Ratios Debt / EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (IT) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Cyient (INFENT) Hold 5, Eclerx (ECLSER) 1,354 1,200 Sell 5, Firstsource (FIRSOU) Buy 2, HCL Tech* (HCLTEC) 839 1,000 Buy 118, Infosys (INFTEC) 1,240 1,400 Buy 285, KPIT Tech (KPISYS) Hold 3, Mindtree (MINCON) 724 1,470 Hold 12, NIIT Technologies (NIITEC) Hold 3, Persistent (PSYS) Hold 6, TCS (TCS) 2,460 2,750 Buy 484, Tech Mahindra (TECMAH) Buy 46, Wipro (WIPRO) Buy 148, * June year end, ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com. ICICI Securities Ltd Retail Equity Research Page 11

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