BUY. Tata Consultancy Services Ltd. Result Update: Q3 FY12 SYNOPSIS. C.M.P: Rs Target Price: Rs Date: Feb.

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1 Tata Consultancy Services Ltd. Result Update: Q3 FY12 C.M.P: Rs Target Price: Rs Date: Feb. 18 th 2012 BUY Stock Data: Sector: IT Face Value Rs wk. High/Low (Rs.) / Volume (2 wk. Avg.) BSE Code Market Cap (Rs in mn) Share Holding Pattern SYNOPSIS Tata Consultancy Services Ltd. (TCS) is an Indian IT services, business solutions & outsourcing company headquartered in Mumbai, India. During the quarter ended, the robust growth of revenue is increased by 36.64% to Rs million. TCS has added forty new clients in the third quarter of the current fiscal. Total head count of the company as on December 2011 stood at 2,26,751 with utilization rate at 82.0%. 1 Year Comparative Graph TCS will expand its operations by building a new software development campus in Nagpur with an investment of Rs. 600 crore in the first phase. TCS Ltd BSE SENSEX TCS & Mitsubishi Corp. announced a new joint venture, Nippon TCS Solution Center Ltd. to establish a near shore delivery center for the Japanese market. Net Sales and PAT of the company are expected to grow at a CAGR of 24% and 20% over 2010 to 2013E respectively. Years Net sales EBITDA Net Profit EPS P/E FY FY 12E FY 13E

2 Peer Group Comparison Name of the company CMP(Rs.) Market Cap. (Rs. mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) TCS Ltd Infosys Ltd Wipro Ltd HCL Ltd Investment Highlights Q3 FY12 Results Update TCS Ltd has reported consolidated net profit of Rs million for the quarter ended on December 31, 2011 as against Rs million in the same quarter last year, an increase of 18.27%. It has reported net sales of Rs million for the quarter ended on December 31, 2011 as against Rs million in the same quarter last year, a rise of 36.64%. Total income grew by 33.06% to Rs million from Rs million in the same quarter last year. During the quarter, it reported earnings of Rs a share, registering 18.27% growth over prior year period. Quarterly Results Consolidated (Rs in mn) As At Dec-11 Dec-10 %change Net sales % PAT % Basic EPS % 2

3 Net Sales & PAT Growth During the quarter, Net sales rose by 36.64% to Rs million from Rs million in the same quarter last year and the Total Profit for the quarter ended December 2011 was Rs million grew by 18.27% from Rs million compared to same quarter last year. EPS The basic EPS of the company stood at Rs for the quarter ended September 2011 from Rs for the quarter ended December

4 Break up of Expenditure TCS, Mitsubishi Corporation joint venture to set up nearshore delivery center in Japan Tata Consultancy Services (TCS) and Mitsubishi Corporation, an integrated global business enterprise announced a new joint venture, Nippon TCS Solution Center Limited, for the Japanese market. The Nippon TCS Solution Center will offer a fullservice suite of IT, BPO and infrastructure services to Japanese corporations. TCS Japan will have a 60% stake with Mitsubishi Corporation having a 40% stake. The new joint venture will also establish a near shore delivery center in Japan. Ranked as a Leader in Application Outsourcing by Everest Group Research Tata Consultancy Services (TCS) has been designated as a Leader in Application Outsourcing (AO) in capital markets by the prominent advisor on the next generation of global services, Everest Group, in its report, Application Outsourcing (AO) in Capital Markets PEAK into the Evolving Service Provider Landscape. Among the attributes that earned TCS the prominent position are its strong customer base, partnerships with capital markets technology vendors, its extensive portfolio of proprietary solutions for capital markets AO delivery and the capital markets related modules of TCS BaNCS. 4

5 TCS BaNCS Insurance transforms Phoenix Group s business to set new benchmark in the UK insurance industry Tata Consultancy Services (TCS) has announced that Diligenta, its UKbased Financial Services Authority (FSA) regulated subsidiary, has successfully concluded a multi-year, multi-million dollar transformation project at Phoenix Group, the UK s largest specialist consolidator of closed life funds. This unprecedented program involved replacing and decommissioning 11 major life and pension administration systems, hundreds of peripheral systems and migrating more than four million policies and customer records, across multiple brands and product lines into TCS BaNCS Insurance. TCS inaugurates Silicon Valley Customer collaboration center in Santa Clara, California Tata Consultancy Services (TCS) has announced the official opening of its Silicon Valley Customer Collaboration Center in Santa Clara, California. Located in the heart of Silicon Valley, the collaboration center is designed to provide an open, innovative and collaborative workspace that adopts the entrepreneurial spirit and best practices employed by the world s leading startup companies in the Valley. The center will also serve as the base for TCS Next Gen Solutions, which applies the latest advances in software technology to real-world business problems that customers may face. TCS ranked as a leader in Canadian SAP Implementation Ecosystem in an IDC MarketScape Report Tata Consultancy Services (TCS) has been designated as a Leader in the Canadian SAP implementation market by the prominent global market intelligence firm IDC in its report, IDC MarketScape: Canadian SAP Implementation Ecosystem Vendor Analysis. Among the attributes that garnered TCS the honor are its wide range of SAP products in Canada, its Global Network Delivery Model (GNDM) and the strong relationship TCS has built with SAP. 5

6 Declares third Interim Dividend Tata Consultancy Services Ltd has declared a Third Interim Dividend of Rs. 3 per Equity Share of Re. 1 each of the Company. TCS selected by Europcar as strategic IT partner in France Tata Consultancy Services (TCS) has announced the signing of a multi-year, multimillion euro contract with Europcar, the car rental leader in Europe. After a rigorous evaluation process, Europcar Information Services (EIS), the company s IT subsidiary, selected TCS to manage strategic IT Services development for its French operations. TCS scored high on all counts and its strong global delivery model (GNDM ) and industry knowledge of its field was key criteria in its selecting them for this project. TCS signs MoU for restoration of iconic Rajabhai Clock Tower and Library at Mumbai University Tata Consultancy Services (TCS) has signed a Memorandum of Understanding (MoU) with Mumbai University for the restoration of the iconic Rajabhai Clock Tower and Library building in coordination with Indian Heritage Society, Mumbai. TCS will fund the project to the tune of Rs 42 million, which includes the restoration of Mumbai library, located at the base of the tower. TCS to set up large software development campus in Nagpur Tata Consultancy Services (TCS) will expand its operations in the state of Maharashtra by building a new software development campus in Nagpur with an investment of Rs 600 crore (Rs 6 billion) in the first phase. The TCS Nagpur Campus will be located on a 54-acre property in the Mihan SEZ on the outskirts of the city. 6

7 Geography Composition Segment Line Distribution 7

8 Clients Revenue Contribution Onsite/Offshore Revenue 8

9 Head Count Growth by Domain Domain-wise contribution to the revenue is given below: IP Revenue (%) Q3 FY12 Q2 FY12 BFSI Telecom Retail & Distribution Manufacturing Hi-Tech Life Science & Healthcare Travel & Hospitality Energy & Utility Media & Entertainment Others

10 Company Profile Established in 1968, Tata Consultancy Services (TCS), a member of the Tata Group is considered as the largest IT services firm in Asia based on its record of outstanding service, collaborative partnerships, innovation and corporate responsibility. TCS Ltd. is an Indian IT services, business solutions and outsourcing company headquartered in Mumbai, India. The service is delivered through its unique Global Network Delivery Model (GNDM), recognized as the benchmark of excellence in software development. TCS has over 2,26,751 of the world s best-trained consultants in 42 countries. The company has generated consolidated revenues of US $8.2 billion for year ended March 31, It is the largest provider of information technology in Asia and second largest provider of business process outsourcing services in India. Quality Framework TCS' ability to deliver high-quality services and solutions is unmatched. It is the world s first organization to achieve an enterprise-wide Maturity Level 5 on both CMMI and P-CMM, using the most rigorous assessment methodology - SCAMPISM. Additionally, TCS Integrated Quality Management System (iqms ) integrates process, people and technology maturity through various established frameworks and practices including IEEE, ISO 9001:2000, CMMI, SW-CMM, P-CMM and 6-Sigma. Products and services offered by TCS TCS offers a wide range of IT services, outsourcing and business solutions. Services IT Services IT Infrastructure Services Enterprise Solutions Consulting Business Process Outsourcing Platform BPO Solutions 10

11 Business Intelligence & Performance Management Engineering & Industrial Services Small and Medium Business Connected Marketing Solutions Consulting Business Consulting IT Consulting Business Solutions Software Products TCS BaNCS TCS Technology Products Other Products - TCS Clin-e2e TCS Hospital Management Solution TCS Silicone Ambulatory ECG Device and Solution TCS Enterprise Integration & Control Environment Solution/ Energy & Utilities TCS Bio-informatics Solution VERICUT - Machine Simulation Software Industry Services Banking & Financial Services Energy, Resources & Utilities Life Sciences & Healthcare High Tech Insurance Manufacturing Media & Information Services Retail & Consumer Products Telecom Travel Transportation & Hospitality 11

12 Financial Results 12 Months Ended Profit & Loss Account (Consolidated) Value (Rs.in.mn) FY10 FY11 FY12E FY13E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Deprecation Profit Before Tax Tax Profit After Tax Minority interest Share of Profit & Loss of Asso Net Profit Equity capital Reserves Face value EPS

13 Quarterly Ended Profit & Loss Account (Consolidated) Value (Rs.in.mn) 30-Jun Sep Dec Mar-12E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Profit After Tax Minority interest Share of Profit & Loss of Asso Net Profit Equity capital Face value EPS

14 Key Ratios Particulars FY10 FY11 FY12E FY13E No. of Shares (in Million) EBITDA Margin (%) 29.86% 31.57% 30.53% 30.48% PBT Margin (%) 27.61% 29.53% 28.61% 28.62% PAT Margin (%) 23.62% 24.62% 21.65% 21.67% P/E Ratio (x) ROE (%) 38.62% 37.66% 30.69% 25.93% ROCE (%) 52.13% 51.13% 45.80% 38.59% EV/EBITDA (x) Book Value (Rs.) P/BV Charts: Net sales & PAT 14

15 P/E Ratio (x) EV/EBITDA (x) 15

16 P/BV Outlook and Conclusion At the current market price of Rs , the stock is trading at x FY12E and x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs and Rs respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 24% and 20% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at x for FY12E and x for FY13E. Price to Book Value of the stock is expected to be at 6.79 x and 5.03 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. 16

17 Industry Overview Over the past few years, the Indian information technology (IT) and IT enabled Services (ITeS) industry has been on a steady growth trajectory. The IT industry, alone, has played a pivotal role in placing India on the world map as a major knowledge-based economy and outsourcing hub. The major sub-segment, that entails Business Process Outsourcing (BPO), is re-inventing itself and experiencing a paradigm shift from being a volume-oriented proposition to a value-oriented proposition by expanding its scope of services and providing substantial high-end solutions in the areas of Data Analytics, Legal Process Outsourcing, etc. The number of internet users in India crossed the 100-million mark in September 2011, growing 13 per cent over last year's figure of 87 million, according to the latest report of the Internet and Mobile Association of India (IAMAI) co-prepared with research firm IMRB. The study anticipates India's internet population to grow to 121 million by December Further, the country's broadband subscriber base stood at million in August 2011, according to data released by the Telecom Regulatory Authority of India (TRAI). Competitive Landscape After personal computers (PCs) and laptops, tablets are mushrooming as a major competitive avenue wherein vendors are striving hard to launch more affordable devices for the Indian market. Second quarter of 2011experienced the release of the ipad2 in India in less than 50 days after its US launch while Samsung is scouting for 40 per cent share of the Indian tablet market in In the enterprise software segment, US giant Oracle claims to cater around 7,000 clients across the Indian government and private sectors; recent wins being Punjab National Bank (PNB) - India's second-largest public sector bank and Hindustan Petroleum Corporation (HPCL) - another Indian public sector organ. Meanwhile, Indian IT companies like Wipro, Infosys, TCS, HCL and Mahindra Satyam are developing their technologies to entail cloud computing applications and solutions for various segments ranging from financial services and banking to manufacturing. 17

18 IT & ITeS - Key Developments and Investments Between April 2000 and August 2011, the computer software and hardware sector received cumulative foreign direct investment (FDI) of US$ 10,787 million, according to the Department of Industrial Policy and Promotion (DIPP). Monster India has launched an online campus hiring initiative - 'Monster College' wherein it will collaborate with educational institutions across India and connect them with over 20,000 employers for campus placements. Investor Relations Global Rankings (IRGR), a New York-based organisation, has ranked Technology giant Infosys as the country's best company for corporate governance practices, financial disclosure procedures, IR website and online annual report. There were more than 80 companies that registered themselves for the rankings. Tower infrastructure company Indus Tower is looking for a partner to provide endto-end IT solutions and Indian tech-biggies like Infosys, IBM and Wipro are in discussions with the former for the same. The contract, potentially in the range of Rs 2,430-2,916 crore (US$ 500-US$ 600 million), would involve areas such as infrastructure management, application development and other related managed services and would span for 8-10 years. Indus Tower, a joint venture firm between Bharti Group, Idea Cellular and Vodafone Essar, owns 110,000 towers and operates 16 out of the 22 telecom circles. Google, with its partner web hosting firm HostGator, has announced that it will offer free web domain names to small and medium businesses (SMBs) in India in order to boost internet usage in Asia's third largest economy. The company will maintain the websites for a year without any charges and at the end of the first year, users will be asked to pay a nominal fee if they wish to renew their domain name. India is shelter to around 8 million SMBs of which about 400,000 have a website and 100,000 have active online presence, said Google. Hence, the market poses a great potential for growth. 18

19 Cloud Computing The Emerging Technology The model of cloud computing has attracted attention of organizations of all sizes as the technology offers lower operational costs, scalability and mobility at every level. Indian companies are increasingly adopting 'hybrid cloud' (a mix of private and public cloud) to address their concerns of data privacy as well. Indian businesses and government agencies are expected to create huge demand for guidance in the usage of cloud computing services. There are already more than 50 cloud computing service providers in the Indian market. Meanwhile, Indian internet services providers (ISPs) and data centre service providers including Bharti Airtel, Sify, Trimax, and NetMagic are investing applications and bandwidth to support new cloud service offerings. NTT Communications Corp plans to invest US$ 1.58 billion in Europe and India over to develop its cloud computing business at a faster pace while AWS, the world's largest cloud-based service provider, that forms about 2 percent of Amazon's revenues, is projected to become the online retail giant's next most-profitable business in India. Soaring e-commerce The US$ 10 billion Indian e-commerce market is expanding exponentially (it grew 47 per cent in 2011 to reach the present size) as rising internet penetration is making customers buy more and more stuff online. Investors are also betting high in the industry; they poured around US$ 200 million into Indian e-commerce start-ups in last couple of years. As a result of such growth, e-retailers, who want to focus on their core functionalities, are expected to outsource bulky back-end operations (such as customer care, order processing, invoice processing, finance and accounts et al) and emerge as a substantial source of revenue to BPOs. Retail brands are expected to bring a great transformation in online space. Women's apparel retail brand Biba and tyre brand Bridgestone have become available online 19

20 recently. IAMAI expects online advertising to increase by per cent in on back of increased internet usage by retailers. Government Initiatives The government of India is leaving no stone unturned to accelerate growth of IT & ITeS sector in the country. Earlier in 2011, the ministry had revealed its intentions to launch e-governance initiatives that would facilitate rolling out mobile governance and electronic service delivery bill. Sufficient funds have also been earmarked to connect Indian villages and classrooms across the country with knowledge centres wherein the government aims to provide broadband connectivity to all the village panchayats by Mr Sachin Pilot, Minister of State for Communications and IT believes that broadening connectivity in such a manner would improve the way government interacts with people. Further, the Ministry of Communications and Information Technology has revealed its intentions to attract higher investments for IT sector in smaller cities and make software services sector grow more than three times to US$ 300 billion by The government also wants to increase the IT exports from US$ 59 billion currently to US$ 200 billion by The projections and focus areas were laid in a draft national policy which also stated that the government will endorse innovation, research and development (R&D) in advanced technologies and application development in areas such as cloud computing, mobile value-added services and social media. The policy also aimed at employing additional 10 million skilled people in the information communication technology sector. The sector currently has manpower strength of 2.5 million skilled people. IT & ITeS in India - Road Ahead The Indian market for IT products and services is expected to consolidate its growth achieved in 2010 and increase from US$ 19.7 billion in 2010 to US$ 41.2 billion by 2015, according to India Information Technology Report for the third quarter of 20

21 2011by Business Monitor International (BMI). BMI estimates that the Indian market for PCs (including notebooks and accessories) will be worth around US$ 8 billion in 2011, higher from US$ 6.8 billion in 2010 while it projects IT services market at around US$ 7.5 billion in 2011 which would further swell to a size of US$ 16.9 billion by The report has estimated a compounded annual growth rate (CAGR) of 18 per cent for Indian software market over the span of Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 21

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