Tata Consultancy Services
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,425
Current market price: Rs1,128

Price target revised to Rs1,425

Result highlights

Satyam an outperformer; target of Rs 542

Event

Using our proprietary margin analysis framework, we conclude that for FY08, there will be an EBITDA margin erosion of 261bps for Satyam. However, we believe Satyam is a good candidate to cross the tier-1 valuation chasm based on strong revenue growth, its converging ROE with Infosys and focus on high-growth engineering services business. We maintain our long-term Outperform rating on the stock, but cut our FY08 EPS forecast by 7%.

Impact

In our proprietary margin analysis, we quantified the effect of ‘sorrow’ factors like a stronger rupee regime (Macquarie’s forecast for FY08 is Rs 40.3 per USD) and wage inflation, and ‘joy’ factors like pricing power and various productivity gain levers. Satyam has USD 650 million of hedging on its books. Based on the 58% natural hedge available to the company and our economics team’s exchange rate forecasts, our calculations suggest that the realised Re rate for Satyam in FY3/08 will be Rs 42.5 per USD. Re appreciation will shave of 248bps from Satyam’s EBITDA margin in FY3/08. Rising wages will dent this by a further 466bps. We have assumed a 15% rise in offshore wages and a 4% increase in onsite wages. The above negatives will be partially offset by levers like better pricing power (163bps), productivity gains (75bps), improvement in the offshore-onsite mix (19bps), an increase in utilisation (22bps) and SG&A leverage (173bps).

Earnings revision

Because of adverse exchange rate movement, we have cut our FY3/08E EPS from Rs 25.8 to Rs 24.0 and our FY3/09E EPS from Rs 31.7 to Rs 30.9.

Price catalyst

12-month price target: Rs 542.00 based on a PER methodology. Catalyst: Large deal wins (>USD 50 million) or an acquisition to penetrate Europe/Japan or building product capabilities.

Action and recommendation

We have cut our earnings forecasts marginally as well as our price target. We maintain our Outperform rating on the stock, with 16% upside from the current level. In the short term, there could be some weakness as Satyam may cut its guidance for FY3/08. However, for long-term investors, it remains an attractive pick in our view.



Neutral on Wipro

Event

Using our proprietary margin analysis framework, we have quantified the effect of ‘sorrow’ factors such as a stronger Rupee regime (Macquarie forecast for FY08 is at Rs 40.3 per USD), wage inflation and ‘joy’ factors such as pricing power and various productivity gain levers. We conclude that for FY08, there will be an EBITDA margin erosion of 388bp for Wipro. This large impact (relative to its peers) is due to its weak hedging position (2 months of net forex inflows compared with the 4 months for Infosys and 7 months for Satyam); coupled with absence of software business and limited pricing power. We downgrade the stock to Neutral from Outperform and cut our FY08 EPS forecasts by 20.3%.

Impact

Wipro has the least amount (USD 600 million) of hedge available among the Tier-1 IT companies. This is sufficient to protect margins only till June 2007. For the full FY3/08, the average realised USD/Rs exchange rate works out to Rs41.1. The rupee appreciation should reduce the EBITDA margin in FY3/08 by 467bp, which is the highest compared with its peers. Rising employee cost, both onsite (4%) and offshore (15%), will result in further decrease in EBITDA margins by 443bp in FY3/08. Coming to some rescue of the EBITDA margin are the levers such as higher price realisation (111bp), productivity gains (78bp), further offshore movement of work (19bp), increase in utilisation (13bp) and SG&A leverage (300bp). We note that Wipro’s margin protection levers are small primarily due to a weaker pricing power and absence of software products business.

Earnings revision

Owing to the negative exchange rate movement, we reduce our EPS estimates for FY3/08 and FY3/09 from Rs 25.2 and Rs 31.1 to Rs 19.8 and Rs 23.4, respectively.

Price catalyst

12-month price target: Rs 499 based on a PER methodology.

Catalyst: Initiatives in the products space or winning large deals (>USD 100 million) or acquisition to penetrate Europe/Japan.

Action and recommendation

We have cut our earnings forecast and revised our price target from Rs 673 to Rs 499. We downgrade Wipro to Neutral from Outperform, and we expect a negative surprise in the 1Q FY3/08 results. There are news reports that the company is looking at a major acquisition in Germany to expand its business in Europe’s largest economy. This may pose an upside risk to our recommendation.



TCS an outperformer; target Rs 1399

Event

Using our proprietary margin analysis framework, we conclude that for FY08 there will be an EBITDA margin erosion of 261bps for Tata Consultancy Services (TCS). However, we believe TCS can adjust to the new paradigm thanks to diversification of its delivery base in near-shore locations like Latin America and Eastern Europe, initiatives in the products business, and inorganic growth potential. We maintain our Outperform rating on the stock, but cut our FY08 EPS forecast by 13%.

Impact

Our proprietary margin analysis quantified the effect of ‘sorrow’ factors like a stronger rupee regime (Macquarie: FY08E Rs 40.3 per USD) and wage inflation, and ‘joy’ factors like pricing power and various productivity gain levers. WTCS started the current financial year with USD 1.1billion of currency forwards and options. This, coupled with 42% of natural hedging provided by its foreign exchange expenses and investments, is enough to shield margins until July 2007. Our calculations suggest that the realised foreign exchange rate for TCS will be Rs 41.4 per USD in FY3/08. The adverse impact of Re appreciation will result in a lowering of its EBITDA margin by 351bps in FY3/08. An increase in onsite wages (4%) and offshore wages (15%) will have a further negative impact of 399bps. The good news is the positive impact of levers like pricing (122bps), productivity gains (88bps), further offshore movement of work (17bps), an increase in utilisation (18bps) and SG&A leverage (244bps).

Earnings revision

Primarily due to the adverse exchange rate movement, our FY3/08E and FY3/09E EPS have been cut from Rs 54.7and Rs 73.1, to Rs 47.8 and Rs 62.9, respectively.

Price catalyst

12-month price target: Rs 1399 based on a PER methodology.

Catalyst: US listing or an acquisition to penetrate Europe/Japan, or some large deal wins (>USD 100 million).

Action and recommendation

We have cut our earnings forecasts and revised our price target from Rs 1654 to Rs 1399. We maintain our Outperform rating on the stock, with 22% upside from the current level. In the short term, there could be some weakness as TCS may guide for slow EPS growth for FY3/08. However, for long-term investors, the stock remains attractive in our view.



Infosys an outperformer; target of Rs 2437

Event

Using our proprietary margin analysis framework, we conclude that for FY08 there will be an EBITDA margin erosion of 210 bps for Infosys. However, we believe Infosys can adjust to the new paradigm thanks to its pricing power, initiatives in the products business and inorganic growth potential. Despite cutting our FY08 EPS forecast by 8.1%, we maintain our Outperform rating on the stock.

Impact

In our proprietary margin analysis, we quantified the effect of ‘sorrow’ factors like a stronger rupee regime (Macquarie’s forecast for FY08 is Rs 40.3/USD) and wage inflation, and ‘joy’ factors like pricing power and various productivity gain levers. Infosys has USD 1billion of hedging on its books. Based on the natural hedge available to the company and our economics team’s exchange rate forecasts, our calculations suggest that the realised Re rate for Infosys in FY3/08 will be Rs 41.6 per USD. Rupee appreciation will shave off 335bps from the EBITDA margin in FY3/08. Meanwhile, rising wages will dent this by a further 377bps. We have assumed a 15% rise in offshore wages and 4% increase in onsite wages. The above negatives will be partially offset by levers like pricing (147bps), productivity gains (77bps), further offshore movement of work (25bps), an increase in utilisation (37bps) and SG&A leverage (217bps).

Earnings revision

Because of adverse exchange rate movement, our FY3/08E EPS has been cut from Rs 83.7 to Rs 76.9, and our FY3/09E EPS been lowered from Rs 113.4 to Rs 103.9.

Price catalyst

12-month price target: Rs 2,437.00 based on a DCF methodology. Catalyst: Winning a couple of greater than USD 100 million deals or acquisition around Europe/Japan penetration.

Action and recommendation

We have cut our earnings forecasts marginally and revised our price target from Rs 2,671 to Rs 2,437. We maintain our Outperform rating on the stock, with 25% upside from the current level. In the short term, there could be some share price weakness as Infosys may cut its guidance for FY3/08 when announcing 1Q FY3/08 results in the second week of July. However, for long-term investors, it remains an attractive pick in our view.

Citigroup TCS, First Global Zee-Q4


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KARVY Daily - (TCS, GHCL, Liberty Shoes), SSKI - Bharti, WeeklyTech


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Motilal Oswal TCS Q4 FY07 Result Update 16 April

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Edelweiss TCS-result update April 17


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2006-07 was another stand-out year, says CEO Ramadorai. Attributing its performance to a “good demand environment and a robust global delivery services model”, the management of Tata Consultancy Services, India’s largest software services company, today announced the company has crossed the $4 billion revenue (Rs 18,685 crore) mark for the year ending March 31, 2007. The group posted a net profit of Rs 1,195.19 crore (under Indian GAAP) for the quarter ended March 31, 2007, against Rs 1,116 crore for the trailing quarter, a 7.09 per cent increase. The figure was 43.63 per cent higher than last year’s corresponding quarter figure of Rs 832.12 crore. Total income stood at Rs 5,162.09 crore for the quarter ended March 31, 2007, against Rs 4,873.44 crore for the trailing quarter, an increase of 5.92 per cent. The figure was 38.50 per cent higher than last year’s corresponding quarter figure. The rupee impact on fourth quarter revenues was 1.87 per cent and it was 0.57 per cent on net profit. The company registered pricing growth of 89 basis points this quarter. Other income of Rs 104.82 crore includes Rs 66.28 crore from the recent sale of its stake in the joint venture with US-based Sitel Corporation. The basic and diluted earnings per share stood at Rs 12.21, a 7.06 per cent increase over the previous quarter’s EPS of Rs 11.41. The results were declared after the markets closed. The company posted a net profit of Rs 4,212.63 crore for the year ended March 31, 2007 – a 42 per cent increase over last fiscal’s figure of Rs 2,966.74 crore. Its total income of Rs 18,685 crore for the year ended March 31, 2007, was a 40.9 per cent increase over last fiscal’s figure of Rs 13,263.99 crore. The EPS for the full year stood at Rs 43.05, a 42 per cent rise over last fiscal’s figure of Rs 30.32. There was a gross addition of 32,462 (net 22,750) employees during 2006-07. In Q4, there was a gross addition of 8,613 (net 5,827) employees. TCS continued to maintain the lowest attrition rate of 11.3 per cent in the industry. At the end of Q4 2006-07, the total employee strength of the company was 89,419 professionals. Commenting on another “stand-out year for TCS”, S Ramadorai, CEO and managing director, said: “TCS’s robust business model using our full-services play and global network delivery has given us the pole position to capitalise on the strong demand environment that exists globally.” He added: “Our emerging high-growth services are giving the company a superior quality of revenue and a diversified customer base across markets and verticals. The significant number of large wins in FY07 that will ramp up in the next fiscal year makes us confident of continuing sustained, profitable growth.”

Highlights Quarter ended March 31, 2007

· 43 new clients added in Q4

· 5,827 employees added in Q4

· Closed two $50m-plus deals and one $35m deal in Q4

· Forward cover of $1 billion provided for FY 2008

· 12-15% salary hikes on India payroll

· 3-5% hikes in international salaries

· Planning development centre in Morocco

· Management does not see any slowdown

Tata Consultancy Services , the leading IT services, business solutions and outsourcing firm reported its consolidated financial results according to US GAAP for the quarter and financial year ended March 31, 2007.

Highlights for Quarter Ended March 31, 2007 * Total Revenues at $1.2 billion; up 8% Q-on-Q * Net Profits at $270 million; up 9% Q-on-Q * 43 new clients added in Q4 * 5,827 associates added in Q4 * Closed two $50m-plus deals and one $35m deal in Q4

Commenting on another stand-out year for TCS, S. Ramadorai, CEO and MD said, "TCS' robust business model using our full-services play and global network delivery model has given us the pole position to capitalize from the strong demand environment that exists globally." Mr. Ramadorai added, "Our emerging hi-growth services are giving the company a superior quality of revenue and a diversified customer base across markets and verticals. The significant number of large wins in FY07 that will ramp up during the next fiscal year makes us confident of continuing sustained, profitable growth."

Commenting on the strong financial performance against the backdrop of currency volatility, S. Mahalingam, chief financial officer, said, "To achieve over $4 billion in revenues in FY07 and over a billion dollars in operating income, we have exercised several levers in terms of pricing, off-shore leverage and cost controls to strengthen profit margins despite a fluctuating rupee." Mr. Mahalingam added, "With an agile hedging strategy and platforms for cost controls in place, TCS is confident of delivering growth with profitability in the coming quarters."

Delivery Certainty to Customers

Hi-growth service lines like Infrastructure, Consulting, Business Intelligence and Assurance services grew by more than 100 per cent in 2006-07 and now contribute 18% to TCS revenues. This is helping the company to maximize its revenues in an environment of strong international demand. Of the 12 deals of over $50-million closed in 2006-07, five deals involved the full- services play with customers using more than one service offering of the company.

Commenting on the deal pipeline and the demand scenario, N. Chandrasekaran, head of global sales and operations said, "The TCS operations engine continues to deliver certainty to customers. "Our full-services play continues to score at an impressive run-rate and this is translating into a very healthy pipeline leading to growth across services and domains, in mature and emerging markets. Mr. Chandrasekaran added, "Last year's large wins are ramping up as planned."

To further strengthen its market position globally and communicate its strengths to customers, TCS launched the first ever global branding and marketing campaign by an Indian corporation during Q4 called "Experience Certainty." "Our brand proposition for the customer center around the experience of certainty -- certainty that technology will always enable their business to focus on their customers," said Phiroz Vandrevala, head of global corporate affairs. "The TCS brand campaign is about communicating these experiences that the biggest global corporations have had with us and the certainty we have delivered to their business to the global market."

Human Resources Update:

There was a gross addition of 32,462 (net 22,750) employees during the 2006-07. In Q4, the gross addition was 8,613 (net 5,827). TCS continued to maintain the lowest attrition rate in the industry at 11.3%. At the end of Q4 2006-07, the total employee strength of the company was 89,419 professionals. Overseas nationals formed 9.6% (8.8% in Q3) of the total employee base with employees coming from 67 different nationalities. 26% of all employees are women.

"We have delivered on retention with the lowest attrition rate in the industry in an environment of intense competition for talent. TCS' global recruitment and training engine has also evolved and matured to meet growing manpower needs of our business," said S. Padmanabhan, head of global human resources. "Our efforts to build a global pool of professionals are bearing fruit with almost 10% of TCS-ers now overseas nationals."

About Tata Consultancy Services (TCS)

Tata Consultancy Services is an IT services, business solutions and outsourcing organization that delivers real results to global businesses, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development.

A part of the Tata Group, India's largest industrial conglomerate, TCS has over 89,000 of the world's best trained IT consultants in 47 countries. The company generated consolidated revenues of US $4.3 billion for fiscal year ended 31 March, 2007 and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at http://www.tcs.com/.