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Buy
| 2600
12 months
14%
Extended transition
Whats Changed?
Target
EPS FY16E
EPS FY17E
Rating
Quarterly Performance
Revenue
EBIT
EBIT (%)
PAT
Q3FY16
27,364
7,276
26.6
6,110
Q3FY15
24,501
6,624
27.0
5,444
YoY (%)
11.7
9.8
-45 bps
12.2
Q2FY16
27,166
7,354
27.1
6,055
QoQ (%)
0.7
(1.1)
-50 bps
0.9
Key Financials
| Crore
Net Sales
EBITDA
Net Profit
EPS (|)
FY14
81,809
25,132
19,117
97.6
FY15E
94,648
27,294
21,696
110.8
FY16E
107,380
30,756
23,960
122.0
FY17E
120,450
33,356
25,543
130.0
FY14
23.4
26.6
17.3
9.1
38.9
49.8
FY15E
20.6
23.5
15.7
8.8
42.8
52.6
FY16E
18.8
21.3
13.7
6.9
36.9
46.4
FY17E
17.6
20.0
12.3
5.6
31.8
40.9
Valuation summary
P/E
Target P/E
EV / EBITDA
P/BV
RoNW (%)
RoCE (%)
Stock data
Particular
Market Capitalization (| Crore)
Total Debt (Dec-15) (| Crore)
Cash and equivalents (Dec-15) (| Crore)
EV (| Crore)
52 week H/L
Equity capital
Face value
Amount
450,578.1
178.1
25,664.0
425,092.2
2812 / 2345
195.9
|1
| 2280
1M
3M
6M
12M
(4.5)
(1.5)
(2.5)
(3.8)
(12.5)
(5.5)
(6.7)
(4.9)
(8.3)
13.2
(0.7)
(12.1)
(9.6)
0.3
(2.0)
3.3
Research Analyst
Abhishek Shindadkar
abhishek.shindadkar@icicisecurities.com
Q3FY16 earnings were soft as growth was below our and consensus
estimates while margins were in line. US$ revenues declined 0.3%
QoQ to $4,145 million vs. our 0.5% growth & $4,177 million estimate
Constant currency revenues grew 0.5% QoQ led by growth in
international business (1.1%) partially offset by weakness in India (60 bps) business
At 26.6%, EBIT margins declined 50 bps QoQ weighed by increased
SG&A expenses (-60 bps) but were in line with our 60 bps decline
and 26.5% estimate. PAT of | 6,110 crore was marginally ahead of
our | 6,010 crore estimate
TCS announced an interim dividend of | 5.5/share
Soft quarter leads to estimate revision
We are adjusting our estimates lower as 9MFY16 YoY growth of 6.8% is
the slowest since FY10, when revenues grew 1.6%. We now expect $
revenues to grow 6.9% (7.5% earlier) in FY16E and 10.5% in FY17E
translating to FY15-17E CAGR of 8.7% (10%). That said, change in rupee
assumption to | 65/| 66 for FY16E/FY17E vs. | 63.5 each earlier leads to a
modest raise in our rupee revenue estimates.
Margins continue to be in the target band
At 26.6%, EBIT margins declined 50 bps QoQ weighed by increased
SG&A expenses (-60 bps) partially offset by rupee tailwind (10 bps) but
were in line with our 26.5% estimate. Margins continue to be within the
aspirational 26-28% band and demonstrate TCS superior execution
capabilities. We expect 11 bps decline in FY16E margins to 26.8% while
those in FY17E could decline 90 bps to 25.9%.
Client mining encouraging
Demand trends continues to be healthy as TCS signed nine large deals
spread across North America (three), Europe (three), LatAm (two) and UK
(one). Client transitions were also good as one client transitioned to $100
million+ bucket, two to US$20-50 million, five to $10-20 million, two to
$5-10 million, and 10 to $1 million+. At 80.9%, including-trainees,
utilisation declined 140 bps QoQ while ex-trainees utilisation declined 110
bps led by impact of Chennai floods, higher gross addition, and ~10,500
lateral hires. Though attrition declined 30 bps QoQ and 250 bps YoY to
15.9% it continues to be at elevated levels. Absolute attrition was lower
QoQ (13,047 vs. 14,501 in Q2) and could moderate further.
Deal signings continue to be healthy
TCS signed nine large deals in Q3 (13 in Q2FY16, nine in Q1, nine in
Q4FY15, seven in Q3 and eight in Q2) spread across key verticals. Three
deals came from banking and one each from insurance, manufacturing,
retail, telecom, utilities and travel. Recall, management had highlighted in
Q2 earnings that TCV of deals signed is 30% higher than its previous best.
Growth intact but in transition; maintain BUY
We estimate rupee revenue, adjusted PAT CAGR of 12.8%, 8.5% in FY1517E (average 26.4% EBIT margins in FY16-17E), vs. 26% each reported in
FY10-15 (average 27.5% margins), respectively. We are adjusting our
dollar revenue growth estimates lower to account for slowest start to any
year since FY10 and also ascribe a lower multiple to account for growth
deceleration. Consequently, we now value TCS at | 2,600 (20x FY17E EPS
of | 130) vs. | 2,800 (21.5x FY17E EPS of | 130) earlier but maintain our
BUY rating.
Variance analysis
Q3FY16 Q3FY16E
Q3FY15
YoY (%)
Q2FY16
QoQ (%)
Comments
Constant currency revenues grew 0.5% QoQ as growth in international business
0.7 was offset by weakness in India
0.5
Revenue
Employee expenses
27,364
14,883
27,514
15,090
24,501
13,216
11.7
12.6
27,166
14,816
Gross Margin
Gross margin (%)
SG&A expenses
12,481
45.6
4,734
12,424
45.2
4,622
11,285
46.1
4,232
10.6
-45 bps
11.9
12,350
45.5
4,527
1.1
15 bps
4.6
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
7,747
28.3
471
7,276
7,801
28.4
506
7,295
7,053
28.8
429
6,624
9.8
-48 bps
9.7
9.8
7,822
28.8
469
7,354
-1.0
-48 bps
0.4
-1.1
26.6
699
7,975
1,850
6,110
26.5
676
7,971
1,921
6,010
27.0
630
7,254
1,745
5,444
-45 bps
11.1
9.9
6.0
12.2
27.1
675
8,029
1,936
6,055
-50 bps EBIT margins declined 50 bps QoQ weighed by increased SG&A expenses
3.6
-0.7
-4.4
0.9 Reported PAT was marginally ahead of our estimate
344,691
15.9
341,260
16.0
318,625
13.4
8.2
250 bps
335,620
16.2
82.1
62.3
-120 bps
5.9
82.3
65.4
Key Metrics
Closing employees
Overall attrition (%)
Change in estimates
(| Crore)
Old
FY16E
New % Change
Revenue
105,537 107,380
EBIT
28,240
28,823
EBIT Margin (%)
26.8
26.8
PAT
23,335
23,960
EPS (|)
119.0
122.0
Source: Company, ICICIdirect.com Research
1.7
2.1
0 bps
2.7
2.5
Old
118,745
31,447
26.5
25,515
130.0
FY17E
New % Change
120,450
31,176
25.9
25,543
130.0
1.4
-0.9
-60 bps
0.1
0.0
Comments
Trimming dollar estimates but higher rupee assumption leads to increase in rupee
estimates
Assumptions
Closing employees
FY14
300,464
FY15
319,656
Current
FY16E
340,913
FY17E
373,071
16.5
82.9
65.0
15.5
84.1
66.0
Earlier
FY16E
FY17E
345,708 345,708
15.0
83.1
63.5
15.0
83.1
63.5
Comments
Better than industry average wage hikes (~8% offshore, ~3% onsite), special
bonus payouts could help contain rising attrition
Page 2
Company Analysis
Key highlights: Commentary from earnings call
Japan, Diligenta continue to be weak spots. LatAm recovery
continues in Q3 (grew 13.3% QoQ-CC on top 6.2% in Q2).
Diligenta, energy woes could bottom in Q4 while Japan is in wait
and watch mode led by higher than anticipated delay in resolving
integration related concerns.
The Ignio platform, AI-based automation product in software-as-aservice category, is tracking well. Four new deals were signed,
while deals signed in prior quarters have seen go-lives.
Digital business grew 4% in CC terms (10.7% in Q2) along with 40
bps improvement in contribution to 13.7% vs. 13.3% in Q2.
No negative news from customers related to CY16E IT budgets.
However, the company would wait for few more weeks before
calling out vertical trends.
From a vertical perspective, BFS traction continues led by healthy
deal wins.
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 large verticals, BFSI (40.5% of revenues, grew 0.7%
QoQ in CC), manufacturing (9.9%, 2.3%), life sciences (7.3%, 4.1%), hitech (6%, 2%), grew above company average while retail & distribution
(13.8%, 0.3%), telecom (8.4%, 0.3%) grew below. Smaller verticals travel
(3.6%, 2.9%), energy & utilities (4.1%, 1.6%), and media (2.5%, 2.5%)
aided company average growth. Geographically, North America (53.5%,
1.4%), Continental Europe (10.9%, 2.3%), LatAm (2.1%, 13.3%) led,
helped by APAC (9.4%, 0.4%) while UK (15.9%, -0.7%), India (6%, -6.7%),
and MEA (2.2%, -5.8%) were soft.
Growth was muted across service lines baring IMS, BPO and engineering
services. IMS (15.2% of revenues, grew 3.7% QoQ in CC), engineering
services (4.5%, 1.5%), BPO (11.8%, 3.5%) led quarterly growth while
ADM (39.7%, -0.2%), enterprise solutions and consulting (17.4%, -0.1%)
and asset leveraged solutions (2.8%, -11.6%) were particularly weak.
Soft quarter leads to estimate revision
TCS Q3FY16 earnings missed estimates as volume (0.4%) growth in a
seasonally soft quarter, though similar to Q3FY15, was offset by
weakness in India. Noticeably, 9MFY16 YoY growth of 6.8% is the slowest
since FY10, when revenues grew 1.6%. We now expect $ revenues to
grow 6.9% (7.5% earlier) in FY16E and 10.5% in FY17E translating to
FY15-17E CAGR of 8.7% (10%). That said, change in rupee assumption to
| 65/| 66 for FY16E/FY17E vs. | 63.5 each earlier leads to a modest raise
in our rupee revenue estimates. Note, demand environment across
verticals (financial services, life sciences, manufacturing in core markets,
retail), geographies (the US, UK ex Diligenta, APAC) and services (digital,
IMS, assurance) continues to be encouraging. However, Japan and
Diligenta are challenged and, thus, creating growth volatility.
Page 3
Exhibit 1: Dollar revenues may grow at 8.7% CAGR in FY15-17E vs. 19.5% during FY10-15
21000
29.1
18250
16520
18000
35
28
15454
13442
15000
17.7
21
11568
14.3
12000
10171
16.7
16.2
10.5 14
15.0
13.7
5.4 8187
9000
9.3
11.3
6339
5.8 5.4 6.9
7
6000
4036 4156 4145
3694 3929 3931 3900
%
$ million
24.2
3000
Dollar revenues
FY17E
FY16E
Q3
Q2
Q1
FY15
Q4
Q3
Q2
Q1
FY14
FY13
FY12
FY11
FY10
Growth, YoY
Exhibit 2: TCS growth vs. Nasscom guidance soft 9MFY16 suggests that FY16E growth could
be lower than Nasscom average in FY16E
40
29.1
32
24.2
24
16
8
18.7
16.0
6.8
16.5
13.7
10.2
16.2
13.0
15.014.0
13.0
6.9
5.4 5.5
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
NASSCOM guidance
Page 4
Exhibit 3: FY16E margins may decline 11 bps YoY to 26.8% primarily led by wage hike, visa costs
partially offset by operational efficiency
32
29.1
30
28
27.8 27.6
26.5
27.0
26.3
26.3
27.1
26.6 26.8
26
25.9
24
FY17E
FY16E
Q3
Q2
Q1
FY15
Q4
Q3
Q2
Q1
FY14
FY13
FY12
FY11
FY10
22
EBIT Margin
819
838
Q3
804
Q1
FY10
458
791
FY15
409
791
Q4
405
FY09
600
714
764
Q3
638
743
Q2
800
724
Q1
1000
Q2
522
400
200
FY14
FY13
FY12
FY11
$1 million+ clients
Page 5
Exhibit 5: Utilisation decline led by loss of business days due to Chennai floods
85
82
79.8
79
76.2
%
76
82.9
84.1
80.9
75.7
74.5
74.1
82.9 82.3
82.1 81.5
81.3
81.2
72.3
73
FY17E
FY16E
Q3
Q2
Q1
FY15
Q4
Q3
Q2
Q1
FY14
FY13
FY12
FY11
FY10
70
14.4
14
12
14.9 14.9
12.2
11.8
10.6
11.3
12.0
12.8
16.5
15.9 16.2 15.9
15.5
13.4
Page 6
FY17E
FY16E
Q3
Q2
Q1
FY15
Q4
Q3
Q2
Q1
FY14
FY13
FY12
FY11
FY10
10
1800
1200
600
Price
24
20
16
12
Jan-16
Jun-15
Nov-14
Apr-14
Sep-13
Feb-13
Jul-12
Dec-11
May-11
Oct-10
Mar-10
Aug-09
Jan-09
Jun-08
Nov-07
Apr-07
Exhibit 8: Valuation
FY14
FY15
FY16E
FY17E
Sales
(| cr)
81,809
94,648
107,380
120,450
Growth
EPS
(%)
(|)
29.9
97.6
15.7 110.8
13.5 122.0
12.2 130.0
Growth
(%)
37.4
13.5
10.1
6.6
PE
(x)
23.4
20.6
18.8
17.6
EV/EBITDA
(x)
17.3
15.7
13.7
12.3
RoNW
(%)
38.9
42.8
36.9
31.8
Page 7
RoCE
(%)
68.3
81.8
79.0
74.5
Company snapshot
3,500
3,000
2,500
2,000
1,500
1,000
500
Jan-17
Oct-16
Jul-16
Apr-16
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Key events
Date
Event
TCS seeks alliances with companies in Japan to boost sales to $1 billion, an increase of 20-fold
Jul-11
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
Jul-12
Oct-12
Europcar signs multi-year, multi-million euro contract with TCS to manage strategic IT services development for its French operations
Feb-13
TCS guides to beat Nasscom guidance of 11-14% for FY13 on the back of higher outsourcing demand and volume growth
To hire more workers in China to expand in Asia and reduce dependence on the Americas
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
Apr-14
TCS climbs to record high after reporting a stellar Q2FY14 with eight-quarter high dollar revenue growth and best ever operating margins of 30.2%
Oct-14
Dec-14
Apr-15
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
TCS misses Street expectations though delivers yet another stable quarterly earnings. The Board approves merger of its subsidiary, CMC, with itself
TCS guides for muted Q3FY15E dollar revenue growth led by weak seasonality in BFSI, retail coupled with 220 bps cross currency headwinds
The company delivers weak Q4FY15 earnings led by cross currency headwinds. However, the company expects to better industry average growth during FY16E
TCS company mixed set of Q1FY16. While $ revenue growth was soft (3.5%) in a seasonally strong quarter, EBIT margins were above estimates despite wage hike
Jul-15
The company delivers soft Q2FY15 earnings. $ revenue growth was soft (3%) in a seasonally strong quarter while EBIT margins were in-line. Achieving industry
Oct-15
Source: Company, ICICIdirect.com Research
Top 10 Shareholders
Rank
1
2
3
4
5
6
7
8
9
10
Shareholding Pattern
Name
Tata Group of Companies
Life Insurance Corporation of India
The Vanguard Group, Inc.
OppenheimerFunds, Inc.
BlackRock Institutional Trust Company, N.A.
Aberdeen Asset Management (Asia) Ltd.
Lazard Asset Management, L.L.C.
Capital Research Global Investors
Stewart Investors
JPMorgan Asset Management U.K. Limited
(in %)
Promoter
FII
DII
Others
Recent Activity
Buys
Investor name
Life Insurance Corporation of India
First State Investments (Singapore)
Vontobel Asset Management, Inc.
Axiom International Investors LLC
T. Rowe Price International (UK) Ltd.
Source: Reuters, ICICIdirect.com Research
Value
138.6m
44.5m
23.6m
20.9m
15.3m
Shares
3.5m
1.3m
0.6m
0.5m
0.4m
Sells
Investor name
T. Rowe Price Hong Kong Limited
Tata Group of Companies
American Century Investment Management, Inc.
Schroder Investment Management (Singapore) Ltd.
PanAgora Asset Management Inc.
Value
-46.5m
-26.3m
-25.3m
-23.0m
-21.7m
Shares
-1.2m
-0.7m
-0.6m
-0.6m
-0.5m
Page 8
Financial summary
Profit and loss statement
(Year-end March)
| Crore
FY14
FY15
FY16E
FY17E
81,809
94,648
107,380
120,450
29.9
15.7
13.5
12.2
37,855
51,240
58,273
S,G&A expenses
14,471
16,098
52,326
67,338
EBITDA
(Year-end March)
| Crore
FY14
FY15
FY16E
FY17E
25,397
28,564
31,648
33,826
Add: Depreciation
1,349
1,309
1,933
2,180
66,666
-5,117
-2,658
-3,826
-4,328
18,351
20,428
1,667
3,405
1,842
2,095
76,624
87,094
Taxes paid
-7,044
-7,482
-7,437
-7,983
25,132
27,294
30,756
33,356
14,751
19,369
21,334
23,140
Growth (%)
39.0
8.6
12.7
8.5
(Inc)/dec in Investments
-7,479
-254
-2,000
-2,000
Depreciation
1,324
1,870
1,933
2,180
-3,112
-2,943
-3,100
-3,300
1,589
3,140
2,825
2,650
Others
925
1,666
2,825
2,650
25,397
28,564
31,648
33,826
-9,667
-1,701
-2,275
-2,650
6,071
6,656
7,437
7,983
209
211
250
300
PBT
Total Tax
Minority Interest
Exceptional Item
PAT before exceptional item
2048
19,117
21,696
23,960
25,543
Growth (%)
37.5
13.5
10.4
6.6
EPS (|)
97.6
110.8
122.0
130.0
19,117
19,648
23,960
25,543
97.6
100.3
122.0
130.0
| Crore
FY14
FY15
FY16E
-190
-17,168
-9,584
-10,217
10,273
500
9,475
215
-106
Opening Cash
6,769
14,442
18,556
28,031
Closing Cash
14,442
18,556
28,031
38,304
FY14
FY15
FY16E
FY17E
(Year-end March)
196
196
48,999
50,439
64,815
80,141
DPS
49,195
50,635
65,011
80,337
1,256
1,237
1,237
1,237
708
1,128
1,378
1,678
51,467
53,343
67,969
83,595
Assets
Intangible assets
-178
-5,673
-589
196
Tangible assets
0
-10,217
Exchange difference
Total Liabilities
0
-9,584
196
43
-17,020
Preference shares
-15
-5,480
Key ratios
FY17E
Liabilities
Equity Capital
Balance sheet
(Year-end March)
7,035
9,376
10,485
11,549
97.6
110.8
122.1
130.1
251.2
258.5
331.4
409.2
32
79
42
44
73.7
94.7
142.9
195.1
EBIT margins
29.1
26.9
26.8
25.9
PBT Margins
31.0
30.2
29.5
28.1
PAT Margin
23.4
22.9
22.3
21.2
Debtor days
81
79
79
79
Creditor days
25
34
31
29
BV per share
241
169
204
237
CWIP
3,168
2,766
2,766
2,766
RoE
38.9
42.8
36.9
31.8
Goodwill
2,269
2,093
2,117
2,139
RoCE
68.3
81.8
79.0
74.5
Investments-Non current
2,275
169
169
169
RoIC
106.0
128.2
125.4
118.3
15
16
21
24
18,230
20,438
23,187
26,009
23.4
20.6
18.8
17.6
4,311
4,146
4,704
5,277
EV / Net Sales
5.3
4.5
3.9
3.4
5.5
4.7
4.2
3.7
Inventory
Debtors
Loans and Advances
Other Current Assets
Cash
5,899
5,657
6,170
7,101
14,442
18,556
28,031
38,304
Solvency Ratios
42,898
48,813
62,114
76,715
Debt / EBITDA
0.0
0.0
0.0
0.0
15,670
20,318
22,160
24,255
Debt / Equity
0.0
0.0
0.0
0.0
Application of Funds
51,467
53,343
67,969
83,595
Current Ratio
1.8
1.5
1.6
1.6
Quick Ratio
1.8
1.5
1.6
1.6
Page 9
EV/EBITDA (x)
FY15 FY16E FY17E
13.5 11.0
8.6
16.9 12.3 10.6
7.2
5.8
4.4
12.5 11.0
9.0
14.9 13.4 11.4
8.3
6.6
5.6
17.0 14.0 11.2
8.2
5.9
4.9
11.2
9.0
7.2
15.7 13.7 12.3
12.3 12.0
9.7
11.6 10.4
9.1
RoCE (%)
FY15 FY16E FY17E
22.2 21.9 22.4
40.4 47.6 43.7
9.5 11.6 14.1
35.2 31.7 30.5
31.4 29.7 30.1
14.7 17.4 17.4
33.7 32.9 34.3
23.4 29.8 31.9
27.5 26.6 26.6
81.8 79.0 74.5
26.9 24.9 26.5
23.0 22.6 22.4
RoE (%)
FY15 FY16E FY17E
19.2 18.1 18.6
32.1 36.9 33.6
11.2 12.2 12.9
29.3 25.7 24.7
22.5 21.3 21.7
17.0 15.4 14.9
26.6 25.9 26.9
14.3 16.6 16.6
20.7 19.7 19.5
42.8 36.9 31.8
21.5 19.4 20.4
21.2 19.7 19.1
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RATING RATIONALE
Pankaj Pandey
Head Research
pankaj.pandey@icicisecurities.com
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ANALYST CERTIFICATION
We /I, Abhishek Shindadkar, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views
about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
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