Asia Pacific/India Equity Research Computer Services & IT Consulting (IT Services) / OVERWEIGHT Rating (from Outperform) NEUTRAL* Price (22 Apr 11, Rs) 1,191.65 Target price (Rs) (from 1,325.00) 1,275.00¹ Chg to TP (%) 7.0 Market cap. (Rs mn) 2,332,322 (US$ 52,553) Enterprise value (Rs mn) 2,266,899 Number of shares (mn) 1,957.22 Free float (%) 25.99 52-week price range 1238.00-699.10 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Share price performance 1200 700 200 Research Analysts Bhuvnesh Singh 65 6212 3006 bhuvnesh.singh@credit-suisse.com Price (LHS) Sunil Tirumalai 9122 6777 3714 sunil.tirumalai@credit-suisse.com Sagar Rastogi 91 22 6777 3851 sagar.rastogi@credit-suisse.com Rebased Rel (RHS) Apr-09 A ug-09 Dec -09 Apr-10 Aug-10 Dec-10 400 300 200 100 0 The price relative chart measures performance against the BOMBAY SE 30 SHARE SENSITIVE index which closed at 19602.23 on 21/04/11 On 21/04/11 the spot exchange rate was Rs44.38/US$1 Performance over 1M 3M 12M Absolute (%) 11.3-1.7 51.9 Relative (%) 1.3-4.7 35.4 (TCS.BO / TCS IN) DOWNGRADE RATING All positives priced in TCS reported in line March 2011 quarter results. Revenue grew 4.7% QoQ in dollar terms. Management indicated that excluding the Indian business, growth was 5.5% QoQ in dollar terms. The company reported flat margins despite a 200 bp fall in utilisation, benefiting from currency. PAT was 2.5% ahead of estimates due to higher other income. We believe demand environment is good but not extraordinary. Though leading Indian IT companies continue to point at the good demand environment, the March 2011 quarter was weaker than expectations at the beginning of the quarter. We thus believe the environment is good but not extraordinary. Taking a reality check on our estimates, we now build a 27%/26% YoY revenue growth in FY12/13 (USD-based, earlier 30%/28%). Strong performance with respect to peers is priced in. Over the past two years, TCS has delivered the best performance among the large Indian IT companies. This is also reflected in the share performance and the stock now trades at a P/E premium of 11% to Infosys and 20% to Wipro. Downgrade to NEUTRAL. Post results, due to reduction in our revenue estimates, our EPS numbers decline by 5%/8% for FY12/13 leading to the new target price of Rs1,275 (earlier: Rs1,325, DCF based). With a high overweight in investor portfolio and signs of strain on consensus upgrades, we believe the risk-reward is no more in our favour. With hardly a 7% upside to our target price, we downgrade the stock to NEUTRAL. We would be more positive on the stock closer to Rs1,025 and less so around our target price of Rs1,275. Financial and valuation metrics Year 3/11A 3/12E 3/13E 3/14E Revenue (Rs mn) 373,245.1 463,239.6 581,861.7 713,375.6 EBITDA (Rs mn) 111,893.7 135,476.8 170,064.3 204,805.7 EBIT (Rs mn) 103,903.7 124,962.9 157,450.3 190,091.7 Net income (Rs mn) 86,829.3 100,076.9 124,781.9 152,796.5 EPS (CS adj.) (Rs) 44.36 51.13 63.75 78.07 Change from previous EPS (%) n.a. -4.6-7.8 Consensus EPS (Rs) n.a. 52.3 61.8 59.5 EPS growth (%) 26.3 15.3 24.7 22.5 P/E (x) 26.9 23.3 18.7 15.3 Dividend yield (%) 1.2 1.9 1.9 1.9 P/B (x) 9.2 8.1 6.5 5.1 ROE 37.6 37.2 38.6 37.2 Net debt/equity (%) net cash net cash net cash net cash Source: Company data, Thomson Financial Datastream, Credit Suisse estimates DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Focus charts and tables Figure 1: TCS March 2011 quarter results (Rs mn) 4Q10 3Q11 4Q11 QoQ (%) YoY (%) CS Est Difference (%) Net sales 77,365 96,634 101,575 5.1 31.3 101,381 0.2 EBIT 21,280 27,132 28,457 4.9 33.7 28,269 0.7 EBIT margins (%) 27.5 28.1 28.0 27.9 Net Income 19,312 23,302 24,021 3.1 24.4 23,439 2.5 Figure 2: TCS versus Infosys operating metrics comparison (March 2011) QoQ YoY TCS Infosys TCS Infosys Volume growth % 2.9 (1.4) 30.7 17.2 Blended realisation change % (CC) 0.8 2.1 $-revenue growth (%) 4.7 1.1 33.1 23.6 Utilisation incl. trainees (bp increase) (200) (498) 80 (144) Headcount growth (%) 6.3 2.4 23.8 15.0 LTM attrition rate (bp increase) - (50) 260 356 EBIT margin change (bp) (6) (122) 51 (132) Note: 1) Infosys volume and pricing are for only IT services, 2) blended realisation change incorporates impact of mix change of onsite/offshore. Figure 3: TCS 12-month fwd P/E based on consensus 30 25 20 15 10 5 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Figure 4: TCS versus Infosys P/E based on consensus 30% 20% 10% 0% -10% -20% -30% -40% -50% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Source: Bloomberg, Datastream, Company data Source: Bloomberg, Datastream, Company data Figure 5: Indian IT valuations CMP Mkt cap TP P/E EV/EBITDA EV/sales Ticker Rs (US$ mn) Rating (Rs) FY3/12 FY3/13 FY3/12 FY3/13 FY3/12 FY3/13 Tata Consultancy TCS.BO 1,192 52,565 N 1,275 23.3 18.7 16.7 13.0 4.9 3.8 Infosys Technologies INFY.BO 2,909 37,830 N 3,400 21.2 16.9 14.9 11.7 4.5 3.6 Wipro WIPR.BO 463 25,618 O 575 17.0 13.6 12.9 10.3 2.8 2.3 HCL Technologies HCLT.BO 519 8,016 O 640 14.8 11.2 0.2 0.2 0.0 0.0 Mindtree MINT.BO 391 353 U 360 9.7 9.2 4.9 3.9 0.7 0.6 Infotech Enterprises INFE.BO 154 386 U 140 11.8 10.0 6.1 4.9 0.9 0.8 Hexaware HEXT.BO 69 454 U 50 13.8 11.9 9.2 7.9 1.1 1.0 Mphasis MBFL.BO 453 2,145 N 550 10.5 8.8 7.0 6.0 1.5 1.4 Persistent Systems PERS.BO 392 353 O 450 11.2 8.8 5.5 4.2 1.2 0.9 Average 18.6 14.8 12.2 9.7 3.3 2.7 Note: Closing prices as of 21 April 2011:, Datastream (TCS.BO / TCS IN) 2
In line results TCS reported in line March 2011 results. Though its results were better than Infosys, on an absolute basis, we find volume performance weak. The company reported flat margins despite a 200 basis point fall in utilisation, benefitting from currency. PAT was 2.5% ahead of estimates due to higher other income. In line topline, margins TCS reported in line March 2011 numbers. Revenue grew 4.7% QoQ in dollar terms. Management indicated that excluding the Indian business, growth was 5.5% QoQ in dollar terms. EBIT margin stayed flat. EPS was 2.5% ahead due to higher other income. Topline/EBIT/PAT were 0.2%, 0.7% and 2.5% ahead of estimates Figure 6: TCS December 2010 quarter results (Rs mn) 4Q10 3Q11 4Q11 QoQ (%) YoY (%) CS Est Difference (%) Net sales 77,365 96,634 101,575 5.1% 31.3% 101,381 0.2% Gross profit 36,244 44,090 44,612 1.2% 23.1% 45,698-2.4% Gross margins (%) 46.8% 45.6% 43.9% 45.1% EBIT 21,280 27,132 28,457 4.9% 33.7% 28,269 0.7% EBIT margins (%) 27.5% 28.1% 28.0% 27.9% EBITDA 23,121 29,173 30,739 5.4% 32.9% 30,460 0.9% EBITDA margins (%) 29.9% 30.2% 30.3% 30.0% Other income 1,636 1,817 2,263 24.6% 38.3% 835 171.0% Pre-tax income 22,916 28,949 30,720 6.1% 34.1% 29,105 5.5% Income tax exp,/(gains) 3,284 5,385 6,404 18.9% 95.0% 5,297 20.9% As a % of PBT 14.3% 18.6% 20.8% 18.2% Minorities' share of profits 320 262 295 12.6% -7.7% 368-19.8% Net income 19,312 23,302 24,021 3.1% 24.4% 23,439 2.5% Figure 7: TCS ex. CMC results summary TCS excl. CMC 4Q10 3Q11 4Q11 QoQ (%) YoY (%) CS Est Difference (%) Revenues 75,023 93,893 98,634 5.0% 31.5% 98,351 0.3% Gross profit 34,847 42,600 42,998 0.9% 23.4% 43,891-2.0% Gross margins (%) 46.4% 45.4% 43.6% 44.6% EBIT 20,787 26,641 27,966 5.0% 34.5% 27,631 1.2% EBIT margins (%) 27.7% 28.4% 28.4% 28.1% EBITDA 22,597 28,654 30,217 5.5% 33.7% 29,782 1.5% EBITDA margins (%) 30.1% 30.5% 30.6% 30.3% Weak volume growth a bit of a worry Volume growth was weak at 2.9% QoQ (3.3% QoQ excluding India). This is the weakest volume growth in the last eight quarters for the company. (TCS.BO / TCS IN) 3
Figure 8: TCS reported the weakest volume growth in eight quarters Volume growth QoQ 12% 10% 8% 6% 4% 2% 0% Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Good performance versus Infosys TCS volume growth of 2.9% QoQ was unexciting. However, Infosys performance at QoQ volume decline of 1.4% was even worse. Thus, despite an in-line performance, relative comparison makes TCS seems good. Figure 9: TCS versus Infosys operating metrics comparison (March 2011) QoQ YoY TCS Infosys TCS Infosys Volume growth % 2.9 (1.4) 30.7 17.2 Blended realisation change % (CC) 0.8 2.1 $-revenue growth (%) 4.7 1.1 33.1 23.6 Utilisation incl. trainees (bp increase) (200) (498) 80 (144) Headcount growth (%) 6.3 2.4 23.8 15.0 LTM attrition rate (bp increase) - (50) 260 356 EBIT margin change (bp) (6) (122) 51 (132) Figure 10: TCS and Infosys revenue growth performance 14% 12% 10% 8% 6% 4% 2% 0% QoQ US$ revenue growth Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Figure 11: TCS and Infosys margin performance EBIT margins 32% 30% 28% 26% 24% 22% Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 TCS Infosys TCS Infosys Source: Company data Margins sustained Source: Company data TCS reported an EBIT margin drop of just 6 basis points during the quarter despite a drop in utilisation of 200 basis points. The factors behind margin movement during the quarter were: (1) currency (+58 bp); (2) pricing (1 bp); and (3) provisions for doubtful debts (28 bp) and other SG&A expenses (19 bp). Write back of bad loans resulted in a margin movement of negative 20 basis points QoQ. Currency helped offset impact of other factors (TCS.BO / TCS IN) 4
Figure 12: Impact of various costs on margins Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Revenues (Rs mn) 71,718 72,070 74,351 76,503 77,365 82,173 92,864 96,634 101,575 Costs as % of sales: Cost of services 52.1% 50.8% 51.7% 51.2% 50.8% 53.0% 51.5% 52.0% 51.7% Employee costs 44.4% 43.7% 45.0% 44.1% 44.1% 45.4% 44.9% 44.4% 44.4% Depreciation 1.5% 1.4% 1.5% 1.5% 1.5% 1.6% 1.5% 1.5% 1.6% Travel 1.0% 0.9% 0.8% 0.9% 0.9% 1.0% 1.0% 0.9% 0.8% Communication 1.1% 1.0% 1.0% 1.0% 0.9% 1.2% 1.0% 1.1% 1.0% Rent 1.8% 1.9% 1.6% 1.9% 1.8% 1.6% 0.8% 1.3% 1.5% other costs 2.4% 1.9% 1.7% 1.9% 1.7% 2.4% 2.4% 2.7% 2.4% Cost of equipment and software licenses 2.5% 3.6% 2.5% 2.4% 2.3% 2.3% 3.6% 3.1% 2.9% SG&A expenses 21.7% 20.7% 19.5% 19.2% 19.3% 17.5% 16.8% 16.9% 17.4% Employee costs 12.5% 12.6% 11.8% 11.7% 10.9% 11.4% 11.4% 11.2% 11.3% Depreciation 1.0% 1.0% 1.0% 0.9% 0.9% 0.6% 0.6% 0.7% 0.7% Provision of doubtful debts and advances 0.4% 0.7% 0.9% 0.2% 0.8% -0.1% -0.3% -0.3% -0.1% Rent 1.5% 1.2% 0.8% 0.7% 0.7% 0.9% 0.7% 0.9% 0.9% Travel 0.8% 0.6% 0.6% 0.8% 0.7% 0.7% 0.6% 0.8% 0.8% Communication 0.6% 0.5% 0.4% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% Recruitment and training 0.3% 0.2% 0.3% 0.4% 0.5% 0.6% 0.5% 0.6% 0.6% Professional fees 0.9% 0.6% 0.5% 0.6% 0.4% 0.5% 0.5% 0.5% 0.6% Research and development 0.2% 0.2% 0.1% 0.1% 0.7% 0.3% 0.3% 0.3% 0.3% Other costs 3.5% 3.2% 3.2% 3.2% 3.3% 2.2% 2.2% 2.0% 1.8% Source: Company data Customers continue to spend Management stated that while it continued to monitor the macro-environment, customers continued to spend on IT to improve efficiency or growth. It was seeing strong traction in enterprise solutions (up 18% QoQ in dollar terms), which indicated a return of discretionary spend. All verticals except telecommunications grew in the quarter. Going forward, management expects the vertical to grow, albeit at a slower pace compared to the rest of the company. Transportation and hi-tech verticals posted double-digit growth in the quarter in dollar terms. Enterprise solutions spend up 18% QoQ in dollar terms (TCS.BO / TCS IN) 5
Figure 13: TCS quarterly operating metrics Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Dec 08 Employee metrics Total (incl. Indian subsidiary) 143,761 141,642 141,962 149,654 160,429 163,700 174,417 186,914 198,614 Total (excl. Indian subsidiary) 126,150 123,404 123,092 130,509 140,619 142,939 153,168 163,995 175,373 Gross addition (excl. Indian subsidiary) 3,522 2,828 5,530 11,377 14,640 8,464 17,121 16,847 19,324 Net addition (excl. Indian subsidiary) 521 (2,119) 320 7,417 10,110 2,320 10,229 10,827 11,700 Attrition (%) 11.4% 11.5% 11.4% 11.5% 11.8% 13.1% 14.1% 14.4% 14.4% Attrition no. of people 3,001 4,947 5,210 3,960 4,530 6,144 6,892 6,020 7,624 Utilisation (%) Blended with trainees 69.4% 71.3% 73.6% 77.2% 74.3% 74.8% 77.7% 77.1% 75.1% Blended without trainees 79.7% 79.2% 79.5% 81.1% 81.8% 82.6% 83.8% 83.8% 82.4% Client metrics Revenue concentration Top client (%) 4.7% 5.7% 6.8% 8.1% 8.2% 8.1% 8.0% 7.7% 7.4% Top 5 clients (%) 18.6% 19.4% 20.5% 21.5% 21.8% 22.0% 22.1% 21.9% 21.4% Top 10 clients (%) 26.9% 28.0% 28.9% 29.9% 30.2% 30.5% 30.1% 30.1% 29.6% Active clients 985 933 896 917 917 930 936 959 969 New clients 36 26 30 32 39 36 30 35 39 Repeat business (%) 95.6% 99.7% 98.2% 96.5% 95.7% 98.4% 98.3% 97.6% 97.1% Project type break-up of revenues Fixed price (%) 47.1% 47.4% 47.2% 48.0% 48.7% 49.1% 49.0% 49.7% 49.5% Time & Material (%) 52.9% 52.6% 52.8% 52.0% 51.3% 50.9% 51.0% 50.3% 50.5% Revenue break-up by delivery location Onsite (%) 48.2% 44.4% 42.7% 42.5% 43.6% 43.6% 43.9% 43.7% 44.7% Offshore (%) 4.1% 5.2% 6.2% 6.2% 5.4% 5.2% 5.0% 4.9% 5.0% GDC (%) 47.7% 50.4% 51.1% 51.3% 51.0% 51.2% 51.1% 51.4% 50.3% Key industry break up of revenues Financial Services (%) 42.8% 43.9% 45.0% 45.0% 44.4% 44.7% 44.0% 44.6% 44.0% Manufacturing (%) 9.8% 9.2% 8.7% 8.3% 8.3% 7.4% 7.4% 7.2% 7.5% Telecom (%) 13.1% 12.6% 12.0% 12.1% 12.1% 12.7% 12.8% 11.9% 11.0% Retail and distribution (%) 12.0% 12.2% 12.0% 12.0% 12.3% 11.0% 10.9% 10.9% 11.2% Key geographical break-up of revenues Americas (%) 52.4% 52.3% 53.4% 52.5% 54.0% 55.0% 53.7% 53.5% 53.4% UK (%) 17.9% 16.9% 16.5% 16.0% 15.2% 15.1% 15.3% 16.0% 15.5% Europe (%) 10.8% 11.0% 10.6% 10.4% 10.0% 8.9% 9.1% 9.3% 9.9% India (%) 8.2% 9.1% 7.3% 8.5% 8.9% 8.8% 9.9% 9.2% 8.8% Source: Company data (TCS.BO / TCS IN) 6
Outlook remains positive In line with positive commentary from Infosys management, TCS also maintained that the environment remains strong. The company has guided to total gross hires of 60,000 in FY3/12. In our view, there is substantial scope for upward revision to this number. Margins could largely sustain at current levels. Weak volume growth by both Infosys and TCS indicates that while the demand environment is good, it is not extraordinary. Taking a reality check on our estimates, we reduce our EPS estimates by 5%/8% for FY12/13. Positive management commentary In line with positive commentary from Infosys management, TCS also maintained that the environment remains strong. The deal pipeline is better than it was 12 months ago, pricing could improve and nearly all verticals (except telecommunications) are exhibiting good traction. Conservative hiring guidance The company has guided to making total gross hires of 60,000 personnel in FY3/12. In our view, there is substantial scope for an upward revision to this number given that utilisation (including trainees) is fairly high at 75%. Management indicated that it would aim for a fresher:lateral hiring ratio of 50:50 in FY13/12 versus the 45:55 ratio in FY3/11. Margins could sustain at current level The company plans to award wage hikes of 12-14% to its offshore employees and 2-4% to its onsite employees. Management hopes to offset the impact by price increases, operating leverage, utilisation increase (82-84% versus 77-78% historic) and improving efficiency. Taking a reality check on estimates Post results, we downgrade our revenue growth estimates to 27% and 26% over the next two years. This, coupled with a slight change in our margin estimates, leads to a reduction of 5%/8% in our EPS estimates. (TCS.BO / TCS IN) 7
Figure 14: TCS changes to consolidated estimates Old estimates New estimates % change FY3/12E FY3/13E FY3/12E FY3/13E FY3/12E FY3/13E Rs/US$ 44.7 44.7 44.5 44.5-0.5% -0.5% Revenues ($ mn) 10,649 13,630 10,410 13,076-2.2% -4.1% YoY growth ($) 29.8% 28.0% 27.2% 25.6% Rs mn Revenues (Rs mn) 476,119 609,396 463,240 581,862-2.7% -4.5% YoY growth (Rs) 27.6% 28.0% 24.1% 25.6% Gross profit 210,691 271,306 213,456 268,512 1.3% -1.0% Gross margins 44.3% 44.5% 46.1% 46.1% EBIT (Rs mn) 132,171 171,937 124,963 157,450-5.5% -8.4% EBIT margins 27.8% 28.2% 27.0% 27.1% EBITDA 142,685 184,551 135,477 170,064-5.1% -7.8% EBITDA margins 30.0% 30.3% 29.2% 29.2% PBT 135,540 178,004 129,431 164,278-4.5% -7.7% PAT 104,911 135,366 100,077 124,782-4.6% -7.8% Net margins 22.0% 22.2% 21.6% 21.4% EPS (Rs/share) 53.60 69.16 51.13 63.75-4.6% -7.8% (TCS.BO / TCS IN) 8
Rich valuations force downgrade TCS is trading at 22.5x 12-month forward consensus EPS, at the higher end of its historical range. Over the past two years, TCS has delivered the best performance among the largest three Indian IT companies. However, the market has also rewarded TCS for its performance and the stock now trades at a P/E premium of 11% to Infosys and 20% to Wipro. Given its strong share price performance, and a high overweight in investor portfolio, we believe that the risk-reward is no more in our favour. With hardly a 7% upside to our target price, we downgrade shares to NEUTRAL. We would be buyers of the shares closer to Rs1,025 and sellers around our target price of Rs1,275 Trading at higher end of historical range TCS is currently trading at 22.5x 12-month forward consensus P/E, at the higher end of its historical range of 19-25x. Figure 15: TCS 12M fwd P/E based on consensus 30 25 20 15 10 5 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Figure 16: TCS 12M fwd EV/EBITDA based on CS est 25 20 15 10 5 Oct-04 Oct -05 Oct-06 Oct -07 Oct-08 Oct -09 Oct-10 Source: Bloomberg, Datastream, Company data Source: Bloomberg, Datastream, Company data The stock also trades at a premium of 46% with respect to the market, which is at the higher end of its historical range. Figure 17: TCS versus MSCI India 12-month forward P/E 80% 60% 40% 20% 0% -20% -40% Apr-05 A pr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Source: Bloomberg, Datastream, Company data Strong relative performance vs peers priced in Over the past two years, TCS has delivered best performance among the largest three Indian IT companies. However, the market has also rewarded TCS for its performance and (TCS.BO / TCS IN) 9
the stock now trades at a P/E premium of 11% to Infosys and 20% to Wipro (FY12 estimates). Figure 18: TCS versus Infosys 12M fwd P/E (consensus) 30% 20% 10% 0% -10% -20% -30% -40% -50% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Figure 19: TCS versus Wipro 12M fwd P/E (consensus) 40% 30% 20% 10% 0% -10% -20% -30% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Source: Bloomberg, Datastream, Company data Downgrade to NEUTRAL Source: Bloomberg, Datastream, Company data Given strong share price performance, and high overweight in the investor portfolio, we believe that the risk-reward is no more in our favour. With hardly 7% upside to our target price, we downgrade shares to NEUTRAL. We would be more positive on the stock closer to Rs1,025 and less so around our target price of Rs1,275. (TCS.BO / TCS IN) 10
Financials Figure 20: TCS summary financial estimates Year-end 31 Mar (Rs mn) FY09A FY10A FY11A FY12E FY13E FY14E Income statement Net sales 278,129 300,289 373,245 463,240 581,862 713,376 Gross profit 123,738 138,660 167,853 213,456 268,512 328,639 Gross margins (%) 44.5% 46.2% 45.0% 46.1% 46.1% 46.1% EBIT 66,044 79,591 103,904 124,963 157,450 190,092 EBIT margins (%) 23.7% 26.5% 27.8% 27.0% 27.1% 26.6% Depreciation 5,766 7,208 7,990 10,514 12,614 14,714 EBITDA 71,810 86,799 111,894 135,477 170,064 204,806 EBITDA margins (%) 25.8% 28.9% 30.0% 29.2% 29.2% 28.7% Total non-oper. income (4,673) 2,256 5,247 4,468 6,827 10,983 Pre-tax income 61,372 81,846 109,151 129,431 164,278 201,075 Income tax exp/(gains) 9,013 12,088 21,203 27,984 37,920 46,467 Net income 52,359 69,758 87,948 101,447 126,357 154,608 Net income after extra-ordinaries and minorities 51,746 68,729 86,829 100,077 124,782 152,797 EPS (Rs) 26.44 35.12 44.36 51.13 63.75 78.07 Balance sheet Total current assets 121,941 138,149 171,948 230,512 318,130 438,063 Cash and short-term investments 14,839 46,774 47,401 73,448 122,152 199,233 Receivables and other current assets 107,102 91,376 124,547 157,064 195,978 238,830 Net fixed assets 37,490 41,706 52,340 60,479 67,865 73,151 Gross fixed assets 64,023 75,447 94,072 112,633 132,633 152,633 Less : depreciation 26,533 33,741 41,731 52,154 64,768 79,482 Capital work in progress - - - - - - Other assets 50,989 58,518 89,929 74,969 74,969 74,969 Associates and long term investments 17,271 37,839 18,390 20,522 20,522 20,522 Total assets 227,691 276,213 332,608 386,481 481,485 606,704 Total current liabilities 61,433 56,197 64,837 87,769 109,515 133,461 Total LT liabilities 6,580 6,843 10,718 8,025 8,025 8,025 Total equity 156,545 209,404 252,389 286,319 359,577 460,849 Minority interest 3,133 3,768 4,663 4,368 4,368 4,368 Total liabilities 227,691 276,213 332,608 386,481 481,485 606,704 Cash flow statement Net income 51,746 68,729 86,829 100,077 124,782 152,797 Add : Depreciation 5,766 7,208 7,990 10,514 12,614 14,714 Total gross cash flows 57,512 75,937 94,819 110,591 137,396 167,510 Change in working capital (2,847) 10,491 (24,531) (9,584) (17,168) (18,906) Cash flow from operation 54,666 86,427 70,288 101,006 120,228 148,605 Change in LT investments-share of profit (17,081) (20,568) 19,449 (2,132) - - Change in fixed asset (13,042) (11,424) (18,624) (18,653) (20,000) (20,000) Change in other asset (27,216) (7,529) (31,411) 14,961 - - Cash flow from investing (57,339) (39,522) (30,586) (5,824) (20,000) (20,000) Equity dividend (16,036) (45,779) (32,013) (51,524) (51,524) (51,524) Change in debt and liabilities (131) 898 4,770 (2,988) - - Change in equity (2,985) 29,910 (11,831) (14,624) 0 (0) Cash flow from financing (19,152) (14,971) (39,074) (69,135) (51,524) (51,524) Change in cash (21,826) 31,935 628 26,047 48,704 77,081 (TCS.BO / TCS IN) 11
Figure 21: TCS key ratios Year-end 31 Mar FY09A FY10A FY11A FY12E FY13E FY14E Margins (%) Gross margins 44.5 46.2 45.0 46.1 46.1 46.1 EBITDA margins 25.8 28.9 30.0 29.2 29.2 28.7 EBIT margins 23.7 26.5 27.8 27.0 27.1 26.6 Net profit margins 18.6 22.9 23.3 21.6 21.4 21.4 YoY growth (%) Revenue growth 22.1 8.0 24.3 24.1 25.6 22.6 Gross profit growth 21.9 12.1 21.1 27.2 25.8 22.4 EBIT growth 25.2 20.5 30.5 20.3 26.0 20.7 EBITDA growth 22.8 20.9 28.9 21.1 25.5 20.4 Net profit growth 3.1 32.8 26.3 15.3 24.7 22.5 Return ratios (%) ROE 36.2 36.9 36.9 36.5 38.1 36.9 ROIC 39.2 37.5 37.1 37.7 42.6 45.6 Turns ratios (x) Working capital turns 4.60 x 4.61 x 3.85 x 4.01 x 4.02 x 4.04 x Fixed asset turns 7.42 x 7.20 x 7.13 x 7.66 x 8.57 x 9.75 x Figure 22: TCS operating metrics Year-end 31 Mar FY09A FY10A FY11A FY12E FY13E FY14E Billing rates YoY growth (%) Onsite -3.2 2.0-0.3 1.6 0.6 0.1 Offshore -5.5 0.0-3.3 1.3 0.6 0.1 Blended -6.9-7.3-2.0 1.5 0.6 0.1 Billed man-months YoY growth (%) Onsite 6.4-14.4 30.5 26.2 25.5 5.4 Offshore 18.7 22.9 30.6 26.2 25.5 5.4 Total 15.1 12.8 30.6 26.2 25.5 5.4 Revenue Onsite YoY growth (%) 6.4-14.4 30.5 26.2 25.5 5.4 Offshore YoY growth (%) 18.7 22.9 30.6 26.2 25.5 5.4 Onsite (% of revenue) 53.9 51.6 43.3 44.0 44.1 44.1 Utilisation rates (%) Including trainees 72.6 74.1 76.2 77.7 79.0 79.4 Excluding trainees 79.8 80.4 83.2 82.1 82.9 83.1 (TCS.BO / TCS IN) 12
Companies Mentioned (Price as of 22 Apr 11) HCL Technologies (HCLT.BO, Rs518.65, OUTPERFORM, TP Rs640.00) Hexaware Technologies (HEXT.BO, Rs69.35, UNDERPERFORM [V], TP Rs50.00) Infosys Technologies Ltd. (INFY.BO, Rs2909.25, NEUTRAL, TP Rs3400.00) Infotech Enterprises Ltd (INFE.BO, Rs153.80, UNDERPERFORM [V], TP Rs140.00, MARKET WEIGHT) Mindtree Ltd (MINT.BO, Rs391.00, UNDERPERFORM [V], TP Rs525.00) Mphasis Ltd (MBFL.BO, Rs453.25, NEUTRAL, TP Rs550.00, MARKET WEIGHT) Persistent Systems (PERS.BO, Rs395.75, OUTPERFORM, TP Rs450.00) (TCS.BO, Rs1191.65, NEUTRAL, TP Rs1275.00) Wipro Ltd. (WIPR.BO, Rs463.20, OUTPERFORM, TP Rs575.00) Disclosure Appendix Important Global Disclosures I, Bhuvnesh Singh, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for INFY.BO INFY.BO Closing Target Price Price Initiation/ Date (Rs) (Rs) Rating Assumption 23-Jun-08 1,847.5 2150 14-Jul-08 1,556.1 2050 24-Sep-08 1,523.7 1800 N 13-Oct-08 1,319.65 1400 24-Nov-08 1,196.2 1650 O 18-May-09 1,769.85 1825 13-Jul-09 1,767.95 1950 2-Sep-09 2,165.2 2550 11-Dec-09 2,454.75 2900 14-Apr-10 2,782.35 3150 18-Oct-10 3107 3575 11-Jan-11 3,329.25 4050 18-Apr-11 2,905.2 3400 N 3601 3101 2601 2101 1601 Rs1101 2150 2050 1800 1650 N 1400 3-Year Price, Target Price and Rating Change History Chart for TCS.BO TCS.BO Closing Target Price Price Initiation/ Date (Rs) (Rs) Rating Assumption 23-Jun-08 429.525 550 25-Jun-08 438.875 O 7-Jul-08 425 537.5 17-Jul-08 391 487.5 24-Sep-08 361.375 375 U 23-Oct-08 266 312.5 24-Nov-08 258.675 362.5 O 21-Apr-09 272.95 325 18-May-09 371.925 362.5 20-Jul-09 500.6 500 2-Sep-09 536.6 625 19-Oct-09 607.5 650 12-Jan-10 748 810 18-Jan-10 800.6 900 20-Apr-10 789 940 22-Oct-10 1038 1175 11-Jan-11 1108 1325 1222 1022 822 622 422 Rs 222 550 538 488 O 1825 1950 2550 2900 24-Apr-08 24-Jun-08 24-A ug-08 24-Oct-08 24-Dec-08 24-Feb-09 24-Apr-09 24-Jun-09 24-Aug-09 24-Oct-09 3150 3575 4050 3400 24-Dec-09 24-Feb-10 24-Apr-10 24-Jun-10 24-Aug-10 24-Oct-10 24-Dec-10 24-Feb-11 Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered O 375 363 U 313 O 325 363 500 625 650 24-Apr-08 24-Jun-08 24-A ug-08 24-Oct-08 24-Dec-08 24-Feb-09 24-Apr-09 24-Jun-09 24-Aug-09 24-Oct-09 900 810 940 1175 1325 24-Dec-09 24-Feb-10 24-Apr-10 24-Jun-10 24-Aug-10 24-Oct-10 24-Dec-10 24-Feb-11 Closing Price Target Price Initiation/Assumption Rating O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered N (TCS.BO / TCS IN) 13
3-Year Price, Target Price and Rating Change History Chart for WIPR.BO WIPR.BO Closing Target 570 575 Price Price Initiation/ 520 515 Date (Rs) (Rs) Rating Assumption 489 470 474 475 23-Jun-08 287.73 318 O 420 N 7-Jul-08 264 300 408 21-Jul-08 223.59 240 U 370 360 24-Sep-08 222.45 216 320 O 318 300 23-Oct-08 163.35 198 270 270 N 240 240 24-Nov-08 140.19 204 O 220 216 U 198 204 18-May-09 254.79 240 N 170 23-Jul-09 273.75 270 O Rs 120 2-Sep-09 332.73 360 O 28-Oct-09 374.07 408 12-Jan-10 416.73 474 Closing Price Target Price Initiation/Assumption Rating 21-Jan-10 425.49 489 25-Oct-10 430.3 475 N O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered 24-Jan-11 444.35 515 21-Feb-11 450.25 575 O The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stock s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. 24-Apr-08 24-Jun-08 24-A ug-08 24-Oct-08 24-Dec-08 24-Feb-09 24-Apr-09 24-Jun-09 24-Aug-09 24-Oct-09 24-Dec-09 24-Feb-10 24-Apr-10 24-Jun-10 24-Aug-10 24-Oct-10 24-Dec-10 24-Feb-11 Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 47% (62% banking clients) Neutral/Hold* 41% (58% banking clients) Underperform/Sell* 11% (51% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. (TCS.BO / TCS IN) 14
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (INFY.BO) Method: Our target price of Rs3,400 for Infosys is based on discounted cash flow (DCF) method. We assume a 22% near-term growth rate, 21% medium-term growth and 5% terminal growth. We use a weighted average cost of capital (WACC) of 14.5% to arrive at our target price. Risks: Risks to our Rs3,400 target price for Infosys Technologies include: 1) a weaker economic environment in the US leading to slower IT services spending; 2) stronger competition by global vendors in the offshore arena; 3) large clients of the company shifting a greater proportion of their work to their in-house centres; 4) greater-than-expected wage inflation; and 5) adverse currency movements. Price Target: (12 months) for (TCS.BO) Method: Our target price of Rs1,275 for TCS is based on discounted cash flow (DCF) method. We assume a 24% near-term growth rate, 19% medium-term growth and 3% terminal growth. We use a weighted average cost of capital (WACC) of 14.5% to arrive at our target price. Risks: Potential risks to our target price of Rs1275 for Tata Consultancy include 1) a slowdown in the US economy, which could lead to a slowdown in revenues, 2) Better margins that we expect, 3) Sharp appreciation or depreciation in the Rs vs. the $ Price Target: (12 months) for (WIPR.BO) Method: Our target price of Rs575 for Wipro is based on discounted cash flow (DCF) method. We assume a 21% near-term growth rate, 19% medium-term growth and 3% terminal growth. We use a weighted average cost of capital (WACC) of 14.5% to arrive at our target price. Risks: Risks to our Rs575 target price for Wipro include: 1) a weaker economic environment in the US leading to slower IT services; 2) greater-than expected wage inflation; 3) adverse currency movements on the downside and revenue and margin outperformance vs. peers on the upside Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (INFY.BO, TCS.BO, WIPR.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (INFY.BO, TCS.BO, WIPR.BO) within the past 12 months. 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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (TCS.BO, WIPR.BO) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Bhuvnesh Singh, non-u.s. analyst, is a research analyst employed by Credit Suisse AG, Singapore Branch. Sunil Tirumalai, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. Sagar Rastogi, non-u.s. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. Taiwanese Disclosures: Reports written by Taiwan-based analysts on non-taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. (TCS.BO / TCS IN) 15
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