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12 January 2017
3QFY17 Results Update | Sector: Technology
TCS
BSE SENSEX S&P CNX CMP: INR2,323 TP: INR2,550(+10%) Neutral 27,247 8,407 Bloomberg TCS IN Equity Shares (m) 1,970 M.Cap.(INRb)/(USDb) 4,577.4 / 67.0
52-Week Range (INR) 2740 / 2055 1, 6, 12 Rel. Per (%) 3/-2/-10 Avg Val, INRm 2840 Free float (%) 26.7
Financials & Valuations (INR b)
Y/E Mar 2016 2017E 2018E
Net Sales 1,086.5 1,188.1 1,345.0 EBITDA 306.8 327.6 367.8 PAT 242.1 266.4 286.2 EPS (INR) 123.2 135.2 145.3 Gr. (%) 11.2 9.8 7.4 BV/Sh (INR) 371.4 427.6 505.5 RoE (%) 37.1 33.8 31.1 RoCE (%) 36.8 32.7 29.4 P/E (x) 18.9 17.2 16.0 P/BV (x) 6.3 5.4 4.6
Estimate change TP change Rating change
Set for new innings under Rajesh Gopinathan… …Amid background of marginal 3Q beat and positive outlook
CFO Rajesh to succeed as the CEO: With Mr. Natarajan Chandrasekaran set to be the chairman of Tata Sons starting February 21, CFO Mr. Rajesh Gopinathan will take charge as the CEO of TCS. He started his professional career with TCS in 2001. He was appointed as the CFO in February 2013, and has also worked in roles of Strategy and Business Finance in the past. TCS also announced N G Subramaniam as the COO of the company.
Marginal 3QFY17 beat: TCS’ 3QFY17 CC revenue growth of 2.0% QoQ and EBIT margin of 26% (flat QoQ) were both 50bp ahead of our estimates. India (+10.3% QoQ), IMS (+9.5% QoQ CC) and Asset Leveraged solution (+21% QoQ CC) drove growth, with BFSI and Retail seeing some recovery to grow at company average. PAT was INR67.8b, +2.9% QoQ compared to our estimate of INR62.5b aided by operating beat and higher other income.
Positive outlook - undeterred by visa implications: TCS expects momentum to sustain in 4Q, which drives our estimate of 2.2% QoQ CC growth next quarter. Commentary was positive on all fronts: [1] Commitment to EBIT margin band of 26-28% for now, despite the potential hike in wages for visa employees, [2] Positive momentum in BFSI as clients shift from cost takeout to growth, [3] Opportunity in traditional business from consolidation.
Valuation & View: For the industry in last couple of years, topmost level changes have understandably been accompanied with a round of flux ( more recently at INFO, WPRO, MTCL), and one will have to be watchful of a potentially similar shuffle at TCS. We tread cautiously as a result of this uncertainty and ascribe a target multiple of 16x (v/s 17x earlier). Over FY16-19, we expect TCS to grow its CC revenue/USD revenue/Earnings at CAGR of 10.1% / 8.3% / 8.8%. Our price target of INR2,550 implies 9% upside. Neutral
Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Ashish Chopra ([email protected]); +91 22 6129 1530 Sagar Lele ([email protected]); +91 22 6129 1531
TCS
12 January 2017 2
3QFY17 marginally ahead of estimates TCS’ 3QFY17 constant currency (CC) revenue growth was 2% QoQ, a tad above
our expectation of 1.5% QoQ CC. Revenue growth was constituted of 1% QoQ volume growth, implying CC
realization improvement of 1%. Adverse cross currency movements impactedrevenues by 170bp, taking reported USD revenue growth down to 0.3% QoQ, atUSD4,387m.
YoY CC revenue growth during the quarter was 8.6% compared to 6.8% in theprevious quarter.
Strength in Digital bounced back up after seeing some weakness in 2QFY17.Revenue from Digital grew by 4.7% QoQ, and it now constitutes to 16.8% oftotal revenue. This compares with contribution of 16.1% in 2QFY17 and 13.7% in3QFY16.
Exhibit 1: YoY CC growth improves to 8.4%, but remains in single digits for the fifth consecutive quarter
Source: MOSL, Company
Exhibit 2: Breakup of revenue growth 1QFY17: USD revenue growth impacts Percentage Volume +1.0Realization change +1.0Cross currency movements -1.7QoQ USD revenue growth (%) +0.3
Source: Company, MOSL
Segmental Color – Strong growth in some clouded by volatility in others On a YoY CC basis, both UK (+4.9%) and Asia Pacific (+3.9%) have been soft. The
rest, excluding North America (+8.7%) have all grown in double digits.Sequentially, North America grew 2.2% QoQ CC, UK grew 1.7% QoQ CC andContinental Europe declined in CC terms QoQ by 1.1%. Double-digit sequentialgrowth was seen in Latin America (+12.5%) and India (+10.3%) sequentially.
Among verticals, Communication & Media declined by 4.9% QoQ CC and LifeSciences & Healthcare by 0.8% QoQ CC. However, these were because of one-offs and aren’t expect to drag going forward. BFSI (40.4% of total revenue) grewby 2.1% QoQ CC. Energy & Utilities saw a strong rebound, growing by 5.8% QoQCC.
Among Services, Products business grew by 21% QoQ CC after seeing a declineof 20% QoQ CC in 2Q. IMS picked up pace again growing by 9.5% QoQ CC.Growth in ADM continued to be soft at -1.3% QoQ CC. Enterprise Solutions &Consulting was flat during the quarter.
4.8
6.1
2.1
1.9
4.8
7.4
2.5
1.6
3.1
3.9
0.5
2.1
3.1
1.0
2.0
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
17
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
CC revenue growth (QoQ, %)17
.3
18.7
18.0
15.7
15.7
17.1
17.6
17.2
15.3
11.5
9.3
9.8
9.8
6.8
8.4
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
17
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
CC revenue growth (YoY, %)
TCS
12 January 2017 3
Exhibit 3: Double digit sequential growth in Latin America and India
Geographies Contr. to
overall rev (%) CC QoQ Gr. (%)
CC YoY Gr. (%)
North America 55.0 2.2 8.7 Latin America 2.2 12.5 15.1 UK 13.3 1.7 4.9 Continental Europe 11.1 -1.1 11.3 India 6.3 10.3 13.1 APAC 9.6 -1.8 3.9 MEA 2.5 3.8 19.8
Source: Company, MOSL
Exhibit 4: Communication and Healthcare drag growth
Verticals Contr. to
overall rev (%) CC QoQ Gr. (%)
CC YoY Gr. (%)
BFSI 40.4 2.1 8.4 Retail & CPG 13.5 1.9 3.4 Communication & Media 10.6 -4.9 5.4 Manufacturing 10.6 2.1 12.5 Life Sciences & Healthcare 7.4 -0.8 9.3 Hi-Tech 5.4 2.6 1.2 Energy & Utilities 4.5 5.8 21.3 Travel & Hospitality 3.8 0.6 12.7 Others 3.8 30.6 21.4
Source: Company, MOSL
Exhibit 5: Strong growth in Infrastructure Services and Asset Leveraged Solutions
Services Contr. to
overall rev (%) CC QoQ Gr. (%)
CC YoY Gr. (%)
ADM 37.2 -1.3 1.6 EAS + Consulting 17.5 0.2 8.7 Testing 9.0 1.7 13.5 Engg Services 4.9 3.1 18.2 IMS 16.8 9.5 19.9 Products 3.0 21.0 17.2 BPO 11.6 1.5 8.2
Source: Company, MOSL
Flat margins, partly aided by one-time in the previous quarter EBIT margin was flat at 26%, marginally ahead of our estimate of 25.5% (-50bp
QoQ). In the previous quarter, costs included USD26m paid to settle the OrangeCounty lawsuit, the absence of which in 3Q resulted in a tailwind of ~60bp.
In cost of services, Equipment & Software costs increased 150bp QoQ despitewhich margins remained flat. The cost was accompanied by a proportionincrease in revenue that got reflected in the growth seen in India, InfrastructureServices and Asset Leveraged Solutions.
PAT was INR67.8b, +2.9% QoQ, compared to our estimate of INR62.5b (declineof 5.1% QoQ) primarily because of slight operational beat and higher OtherIncome.
TCS
12 January 2017 4
Exhibit 6: Margins 50bp ahead of our estimate
Source: Company, MOSL
Leadership changes – Rajesh Gopinathan takes over as CEO, NGS as COO Rajesh Gopinathan has been appointed as CEO and MD. He would take over
from N Chandrasekaran, who has been appointed as Chairman of Tata Sonseffective February 21, 2017.
Rajesh has been the CFO of TCS since February 2013, prior to which he was theVice President – Business Finance, where he was responsible for financialmanagement of the company’s individual operating units.
N Ganapathy Subramaniam (NGS) has been appointed the as the President andChief Operating Officer. He currently is the President of TCS Financial Solutions,and has been part of TCS and the industry for the past 34 years. He has played aglobal role, especially in the Banking and Financial Services sector.
Cash generation strong Cash generation for TCS improved significantly as it generated INR79.6b in cash
from operations, clocking an OCF margin of 26.8%. This has been a sharpimprovement from 21.5% in 3QFY16.
This was led by improvement in DSO of 3 days to 74 in 3QFY17, compared to 77at the end of FY16. Including unbilled revenue, DSO stood at 88 in 3QFY17,compared to 90 at the end of FY16.
Free cash flow at INR75.5b clocking at 111% of net profit. This compares withFCF/net profit of 89% in 3QFY16.
Takeaways from Management commentary One-offs in Communication and Healthcare: Revenue declined sequentially in
the verticals of Communication and Healthcare. In Communication, weaknesswas seen in UK, Europe and Asia Pacific; while in Healthcare the US sloweddown. However, both these factors are one-off, and aren’t expect to continuefollowing the same trend going forward.
Focused on reducing visa dependency: In light of recent regulatorydevelopments, TCS highlighted that it has been a key partner to its clients, whohave been facing business model challenges. It has been ramping up localrecruitment efforts, partnering with universities, and running STEP programmes.TCS has been amongst the top net job creators in the US. It has been continuallyreducing dependency on visas; evident from the fact that it applied for a third ofthe visas this year, compared to the previous year.
18.6 17.3 17.9 17.1 17.5 17.0 17.3 16.3 17.1 16.7 17.3 17.0 17.1 17.1 16.8
27.0
30.2 29.7 29.1
26.3 26.8 27.0 27.2 25.1
27.1 26.6 26.1 25.1 26.0 26.0
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
17
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17
SGA (% of Revenues) EBIT Margin (%)
TCS
12 January 2017 5
Wages up to the mark: Onsite wages at TCV have been benchmarked againsttheir prevailing locations, and adjusted for age and experience. There is a highconvergence of salaries between locals and those in the US on visas. Typically,locals have been hired in senior capacities, while technical gaps have been filledby supply of resources from outside the US.
Buoyancy in BFSI: BFSI, over the last 5-6 years has been focused on cost take-out, regulatory compliance and automation. However, they are now looking atgrowth, and investments in technology. The pipeline, and TCS’ positioning havebeen leading to a buoyant outlook in the vertical.
Margin band maintained: TCS maintained its targeted EBIT margin band of 26-28%. It has been approaching the market in a well-balanced manner to achieveboth growth and profitability. Despite some known and some unknown costpressures, the intent is to maintain profitability in the target band. While somecost pressures can be addressed, the true impact on costs and profitability fromregulatory changes will only be known once details around the legislation aremade know.
Cutting revenue estimates 1.3-2.2% With growth largely in line with estimates in 3QFY17, we haven’t tempered
much with our FY17 growth estimates. However, we have adjusted that forFY18E lower to factor for cross-currency impact.
Our EBIT margin estimates are up slightly (20-25bp) factoring strong executiondemonstrated over the last couple of quarters, coupled with positivecommentary around the intent to maintain the band despite pressures.
Consequently, our earnings estimates are mostly unchanged, with revenuemoderation offsetting the slight margin uptick.
Exhibit 7: Change in estimates Revised Earlier Change
FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E INR/USD 67.5 70.0 70.4 67.5 70.0 70.4 -0.1% 0.0% 0.0% USD Revenue - m 17,670 19,224 20,998 17,761 19,528 21,322 -0.5% -1.6% -1.5%USD revenue growth (%) 6.8 8.8 9.2 7.4 9.9 9.2 -55bp -115bp 5bp EBIT Margin (%) 25.9 25.9 25.4 25.6 25.7 25.4 26bp 22bp 8bp EPS - INR 135.2 145.3 158.4 131.9 147.0 157.5 2.5% -1.2% 0.6%
Source: Company, MOSL
Valuation and view Over FY11-15, TCS had led the incremental revenues as well as operating profits
not just domestically, but also in the global arena (compared to peers multipletimes its size). However, weak areas like Diligenta, Japan and India / LatinAmerica saw the company cede its growth leadership to peers such as CTSH andINFO last year.
During the period of outperformance, TCS’ traction has been impressivelybroad-based, unlike select pockets of stress across its peer group. However,over the past 12 months, some factors that have led relative softness inperformance v/s the company’s expectations have had secular elements(Energy, Telecom and Insurance in FY16, followed by BFSI and Retail this year),as well as company-specific headwinds (India, Japan and Diligenta in particular).
TCS
12 January 2017 6
Geographically, although the company sees some stability in Latin America and India, while Japan may still take a while before delivering sustained growth.
The growth outperformance to industry peers has waned, but it is well investedbuilding Digital capabilities to recoup that advantage. We expect acceleration inrevenue growth from current ~7% YoY CC to ~10% in FY18, led by continuedhigh growth on the increasing Digital base and eventual ramp ups that have hitFY17 momentum.
Uncertain macro limits confidence to proceed with project based IT spendingthat is discretionary in nature, especially in verticals like BFSI and Retail. TCS’exposure to both BFSI and UK is slightly higher than peers, implying thatperformance in near term may not see any sharp revival. Commentary by themanagement and outlook going forward however has been positive led byoptimism around BFSI and opportunity in traditional business fromconsolidation.
For the industry in last couple of years, changes at the very top have beenunderstandably been accompanied with a round of flux (at INFO, WPRO, MTCL),and one cannot rule out the uncertainty from a potentially similar shakeout atTCS. We tread cautiously as a result of this uncertainty and ascribe a targetmultiple of 16x (v/s 17x earlier). Our growth expectations for Revenue / EarningsCAGR over FY16-19E stand at 8.3 / 8.8%. Our target price of INR2,550 discountsFY19 EPS by 16x, and implies 9% upside. Maintain Neutral.
Key triggers Sustained pickup in BFSI | Retail Digital-led resurgence in growth leadership Further recovery in margins in the near term
Key risk factors Further deceleration in YoY CC growth from turbulent macro Rapid appreciation in INR Intensification of pricing pressure
Exhibit 8: TCS 1 year forward PE chart
Source: Company, MOSL
Exhibit 9: TCS 1-year forward PB chart
Source: Company, MOSL
16.7
25.8
17.8
7.0 6
12
18
24
30
Dec-
06
Mar
-08
Jun-
09
Sep-
10
Dec-
11
Mar
-13
Jun-
14
Sep-
15
Dec-
16
PE (x) Peak(x) Avg(x) Min(x)
4.9
10.5
6.1
2.3 1.5
3.5
5.5
7.5
9.5
11.5
Dec-
06
Mar
-08
Jun-
09
Sep-
10
Dec-
11
Mar
-13
Jun-
14
Sep-
15
Dec-
16
PB (x) Peak(x) Avg(x) Min(x)
TCS
12 January 2017 7
Exhibit 10: Comparative Valuation Company Mkt cap Rating TP Upside EPS (INR) P/E (x) RoE (%) FY17-19E CAGR (%)
(USD b) (INR) (%) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E USD rev. EPS TCS 68.1 Neutral 2,550 9.8 135.2 145.3 158.4 17.1 16.0 14.6 33.8 31.1 29.0 9.0 8.3 Infosys 34.1 Buy 1,250 25.1 61.7 67.8 75.0 16.2 14.7 13.3 22.8 22.6 22.5 9.8 10.3 Wipro 17.3 Neutral 560 18.9 34.3 39.5 44.1 13.7 11.9 10.7 17.7 18.5 18.5 7.9 13.5 HCL Tech 17.7 Buy 960 14.1 56.7 63.2 67.2 14.8 13.3 12.5 26.6 25.5 23.2 11.2 8.9 TechM 7.1 Buy 560 16.4 30.9 36.0 39.5 15.6 13.4 12.2 19.1 19.3 18.5 8.9 13.1 Tier-I Aggr 144.3 15.5 13.9 12.7 24.0 23.4 22.3
Source: Company, MOSL
TCS
12 January 2017 8
Story in charts
Exhibit 11: Outperformance to peers has waned…
Source: Company, MOSL
Exhibit 12: … amid fast decelerating revenues
Source: Company, MOSL
Exhibit 13: Revenue growth getting delinked to headcount…
Source: Company, MOSL
Exhibit 14: ...as competitive intensity gradually pulls down pricing
Source: Company, MOSL
Exhibit 15: Operating at peak efficiency, reflected in utilization (assumed 4QFY16 onwards)…
Source: Company, MOSL
Exhibit 16: ..Margins continue to be within the targeted range
Source: Company, MOSL
29.1
26.0
18.9
31.1
24.2
16.0
13.4
17.1
13.7
5.7
5.0
12.9
16.2
11.5
6.4
14.4
15.0
5.6
7.0
11.1
7.0
9.1
3.7
7.1
6.6
9.5
6.1
10.7
TCS Infosys Wipro (ITServices)
HCL Tech
FY11 FY12 FY13 FY14 FY15 FY16 1HFY17
17.3
18.7
18.0
15.7
15.7
17.1
17.6
17.2
15.3
11.5
9.3
9.8
9.8
6.8
8.4
1QFY
14
2QFY
14
3QFY
14
4QFY
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1QFY
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2QFY
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3QFY
15
4QFY
15
1QFY
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2QFY
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3QFY
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4QFY
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1QFY
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2QFY
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3QFY
17
CC revenue growth (YoY, %)
100110120130140150160170
1QFY
13
3QFY
13
1QFY
14
3QFY
14
1QFY
15
3QFY
15
1QFY
16
3QFY
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1QFY
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3QFY
17
Headcount USD revenues
94
96
98
100
102
1QFY
12
3QFY
12
1QFY
13
3QFY
13
1QFY
14
3QFY
14
1QFY
15
3QFY
15
1QFY
16
3QFY
16
1QFY
17
3QFY
17
Picing indexed at 100
82.7 83.4 84.3 83.8 85.3 86.2 86.7 85.4 84.9 86.0 84.9 84.9 84.9 86.0 84.9
72.5 75.0
77.5 77.9 79.8 81.3 82.1 81.5 82.0 82.3 80.9 80.9 82.0 83.0 82.0
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
17
2QFY
16
3QFY
16
4QFY
16
1QFY
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2QFY
17
3QFY
17
Util Excl. Trainees (%)
18.6 17.3 17.9 17.1 17.5 17.0 17.3 16.3 17.1 16.7 17.3 17.0 17.1 17.1 16.8
27.0 30.2 29.7 29.1
26.3 26.8 27.0 27.2 25.1
27.1 26.6 26.1 25.1 26.0 26.0
1QFY
14
2QFY
14
3QFY
14
4QFY
14
1QFY
15
2QFY
15
3QFY
15
4QFY
15
1QFY
17
2QFY
16
3QFY
16
4QFY
16
1QFY
17
2QFY
17
3QFY
17SGA (% of Revenues) EBIT Margin (%)
TCS
12 January 2017 9
Exhibit 17: Operating Metrics 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17
Service Lines (%) ADM 40.5 39.5 40.1 40.3 40.0 39.7 39.4 38.5 38.4 37.2 Engineering and Industrial Services 4.6 4.5 4.5 4.5 4.5 4.5 4.7 4.8 4.8 4.9 Infrastructure Services 13.8 14.3 14.5 14.7 14.7 15.2 15.2 15.5 15.7 16.8 Enterprise Solutions 15.6 15.4 15.4 15.1 15.0 Global Consulting 3.2 3.7 3.2 2.9 2.5 Enterprise Solutions & Consulting 18.8 19.1 18.6 18.0 17.5 17.4 17.1 17.7 17.8 17.5 Asset Leverage Solutions 2.3 2.4 2.3 2.5 3.2 2.8 3.2 3.2 2.6 3.0 Assurance Services 8.4 8.5 8.4 8.5 8.7 8.6 8.8 8.8 9.0 9.0 BPO 11.6 11.7 11.6 11.5 11.4 11.8 11.6 11.5 11.7 11.6
Industry Verticals (%) BFSI 40.4 40.5 40.6 40.6 40.5 40.5 40.9 40.4 40.4 40.4 Manufacturing 10.1 10.1 10.2 9.9 9.8 9.9 10.4 10.4 10.7 10.6 Telecom + Media 11.6 11.6 10.8 11.1 10.8 10.9 10.8 11.3 11.4 10.6 Life Sciences & Healthcare 6.3 6.4 6.7 6.9 7.0 7.3 7.3 7.3 7.6 7.4 Retail & Distribution 13.5 13.4 13.6 13.8 13.8 13.8 14.1 14.0 13.4 13.5 Transportation 3.5 3.5 3.4 3.5 3.6 3.6 3.7 3.9 3.9 3.8 Energy and Utilities 4.3 4.2 3.9 4.0 4.0 4.1 4.1 4.2 4.3 4.5 Hi-Tech 5.7 5.9 6.0 5.8 5.9 6.0 5.6 5.4 5.4 5.4 Others 4.6 4.4 4.8 4.4 4.6 3.9 3.1 3.1 2.9 3.8
Geographies (%) America 51.0 51.9 52.4 52.8 52.7 53.5 54.0 53.5 54.0 55.0 UK 17.1 16.1 15.9 16.1 16.4 15.9 14.9 14.8 13.8 13.3 Rest of Europe 11.5 11.7 11.1 11.0 10.8 10.9 11.2 11.5 11.8 11.1 Europe 28.6 27.8 27.0 27.1 27.2 26.8 26.1 26.3 25.6 24.4 India 6.5 6.5 6.6 6.4 6.5 6.0 5.9 6.2 5.8 6.3 APAC 10.1 9.7 9.8 9.6 9.4 9.4 9.6 9.6 10.2 9.6 Latin America 1.9 2.1 2.1 1.9 1.8 2.1 2.0 2.0 2.0 2.2 MEA 1.9 2.0 2.1 2.2 2.4 2.2 2.4 2.4 2.4 2.5 Others 20.4 20.3 20.6 20.1 20.1 19.7 19.9 20.2 20.4 20.6
Revenue Mix (%) Offshore 45.7 46.0 46.0 Onsite 48.9 48.2 48.5 GDC 5.4 5.8 5.5
Utilization Excluding Trainees 86.2 86.7 85.4 86.3 86.0 84.9 Including Trainees 81.3 82.1 81.5 82.9 82.3 80.9
Total Employees 313,757 318,625 319,656 324,935 335,620 344,691 353,843 362,079 371,519 378,497 Trainee Additions 7,583 5,529 5,569 6,425 9,943 7,593 8,623 5,038 11,884 10,950 Lateral Additions 8,924 6,129 5,853 9,337 10,978 10,451 10,659 9,877 7,486 4,804 Overseas Additions 3,843 4,903 2,973 4,540 4,265 4,074 3,294 2,877 3,295 2,608 Gross Additions 20,350 16,561 14,395 20,302 25,186 22,118 22,576 17,792 22,665 18,362 Net Additions 8,326 4,868 1,031 5,279 10,685 9,071 9,071 9,071 9,440 6,978 Attrition (LTM %) 12.8 13.4 14.9 15.9 16.2 15.9 15.5 13.6 12.9 12.2
Source: Company, MOSL
TCS
12 January 2017 10
Exhibit 18: Growth Metrics QoQ growth (%) 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 Service Lines ADM 5.6 -2.4 0.7 4.0 2.2 -1.0 0.7 1.3 0.0 -2.8Engineering and Industrial Services 8.7 -2.1 -0.8 3.5 3.0 -0.3 6.0 5.9 0.3 2.4 Infrastructure Services 16.5 3.7 0.6 4.9 3.0 3.1 1.5 5.7 1.6 7.3 Enterprise Solutions 4.3 -1.2 -0.8 1.5 2.3 0.0 0.0 0.0 0.0 0.0 Global Consulting 6.4 15.7 -14.2 -6.2 -11.2 0.0 0.0 0.0 0.0 0.0 Asset Leverage Solutions -2.2 4.4 -4.9 12.5 31.8 -12.7 16.0 3.7 -18.5 15.7 Assurance Services 3.9 1.2 -2.0 4.7 5.4 -1.4 3.9 3.7 2.6 0.3 BPO 3.7 0.9 -1.6 2.6 2.1 3.2 -0.2 2.8 2.0 -0.6
Industry Verticals BFSI 3.0 0.3 -0.5 3.5 2.7 -0.3 2.5 2.4 0.3 0.3 Manufacturing 24.9 0.1 0.2 0.5 1.9 0.7 6.6 3.7 3.2 -0.6Telecom 0.7 0.1 -9.7 9.9 0.6 -0.3 0.3 9.9 1.4 -8.7Life Sciences & Healthcare 6.4 1.6 3.9 6.6 4.5 4.0 1.5 3.7 4.4 -2.3Retail & Distribution 4.0 -0.7 0.7 5.0 3.0 -0.3 3.7 2.9 -4.0 1.0 Transportation 3.4 0.1 -3.6 6.5 5.9 -0.3 4.3 9.3 0.3 -2.3Energy and Utilities 17.3 -2.3 -7.9 6.2 3.0 2.2 1.5 6.2 2.7 5.0 Hi-Tech 10.2 3.6 0.9 0.0 4.7 1.4 -5.3 0.0 0.3 0.3 Others 8.7 -4.3 8.2 -5.1 7.6 -15.5 -19.3 3.7 -6.2 31.4
Geographies America 3.9 1.8 0.2 4.3 2.8 1.2 2.5 2.7 1.2 2.2 UK 2.7 -5.8 -2.0 4.8 4.9 -3.3 -4.9 3.0 -6.5 -3.3Rest of Europe 1.9 1.8 -5.9 2.6 1.1 0.6 4.3 6.5 2.9 -5.7Europe 2.4 -2.7 -3.6 3.9 3.3 -1.7 -1.1 4.5 -2.4 -4.4India 9.7 0.1 0.7 0.4 4.6 -7.9 -0.2 9.0 -6.2 8.9 APAC 41.3 -3.9 0.2 1.4 0.8 -0.3 3.7 3.7 6.5 -5.6Latin America -8.1 10.6 -0.8 -6.4 -2.5 16.3 -3.3 3.7 0.3 10.3 MEA 1.0 5.3 4.2 8.4 12.3 -8.6 10.7 3.7 0.3 4.5 Others 19.9 -0.4 0.7 1.0 3.0 -2.3 2.5 5.2 1.3 1.3
Offshore 2.7 0.7 -0.9 3.7 Onsite 10.2 -1.4 -0.3 3.7 GDC 0.5 7.5 -6.0 3.7 Overall International business 6.1 0.1 -0.9 3.7 2.9 0.3 1.6 3.4 0.7 1.3 Domestic Business 9.7 0.1 0.7 0.4 4.6 -7.9 -0.2 9.0 -6.2 8.9
Source: Company, MOSL
TCS
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Financials and Valuations Key assumption
2012 2013 2014 2015 2016 2017E 2018E 2019E
INR/USD Rate 48.1 54.4 60.9 61.2 65.7 67.5 70.0 70.4 Revenues (USD m) 10,171 11,568 13,443 15,454 16,544 17,606 19,224 20,998 Offshore Revenue (%) 50.6 49.3 47.9 46.2 46.0 46.0 46.0 46.0 Total Headcount 238,583 276,196 300,464 319,656 353,843 384,899 423,495 457,947 Net Addition 39,969 37,613 24,268 19,192 34,187 31,056 38,596 34,451 Per Capita Productivity 46,528 44,945 46,623 49,843 49,128 47,664 47,560 47,646 Util. excl. trainees (%) 82.2 81.7 83.6 85.9 85.5 85.1 85.2 85.2 Util. incl. trainees (%) 68.7 68.3 75.4 82.0 80.5 81.6 81.2 81.7
Income Statement (INR Million) Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Net Sales 488,938 629,895 818,094 946,484 1,086,462 1,188,069 1,344,965 1,478,291 Change (%) 31.0 28.8 29.9 15.7 14.8 9.4 13.2 9.9 EBITDA 144,177 180,870 251,322 272,941 306,780 327,642 367,801 397,516 EBITDA Margin (%) 29.5 28.7 30.7 28.8 28.2 27.6 27.3 26.9 Depreciation 9,036 10,792 13,243 18,698 18,879 19,834 19,364 21,345 EBIT 135,141 170,078 238,079 254,243 287,901 307,809 348,437 376,171
Other Income 4,041 11,174 15,891 31,393 30,498 42,544 27,574 33,790 Extraordinary items 0 0 0 0 0 0 0 0 PBT 139,182 181,252 253,969 285,636 318,399 350,353 376,011 409,961
Tax 31,688 40,344 60,712 66,564 75,026 83,095 88,363 96,341 Tax Rate (%) 22.8 22.3 23.9 23.3 23.6 23.7 23.5 23.5 Min. Int. & Assoc. Share 1,110 1,494 2,089 2,114 1,227 891 1,440 1,440 Reported PAT 106,384 139,413 191,168 216,958 242,146 266,367 286,208 312,180 Adjusted PAT 106,384 139,413 191,168 216,958 242,146 266,367 286,208 312,180 Change (%) 22.5 31.0 37.1 13.5 11.6 10.0 7.4 9.1
Balance Sheet (INR Million) Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Share Capital 1,957 1,957 1,959 1,959 1,970 1,970 1,970 1,970 Reserves 323,276 407,524 551,393 572,808 729,929 840,490 993,907 1,157,173 Net Worth 325,233 409,481 553,352 574,767 731,899 842,460 995,877 1,159,143
Preference Shares 1,000 1,000 0 0 0 0 0 0 Minority Interest 5,276 6,561 6,905 9,136 3,542 3,550 3,550 3,550 Loans & Other Liabilities 12,306 10,894 12,561 19,004 14,092 14,361 16,362 17,718 Total Capital Employed 343,815 427,936 572,817 602,907 749,533 860,371 1,015,789 1,180,410
Gross Fixed Assets 107,400 135,587 170,530 201,300 222,363 260,070 288,260 316,450 Less: Acc Depreciation 42,852 53,644 66,887 85,585 104,464 124,297 143,661 165,007 Net Fixed Assets 64,548 81,944 103,644 115,716 117,900 135,773 144,599 151,444 Investments 0 33,765 37,673 7,283 7,831 2,670 2,670 2,670 Current Assets 347,442 403,836 547,808 626,539 786,397 880,285 1,047,044 1,219,475 Debtors 137,469 172,366 222,360 242,670 280,646 309,919 354,982 385,512 Cash & Bank 34,617 79,035 156,495 197,713 292,021 348,078 440,621 556,983 Loans & Adv, Others 175,356 152,435 168,953 186,157 213,731 222,288 251,441 276,980 Curr Liabs & Provns 68,175 91,609 116,308 146,630 162,594 158,357 178,523 193,178 Curr. Liabilities 68,175 91,609 116,308 146,630 162,594 158,357 178,523 193,178 Net Current Assets 279,267 312,228 431,500 479,909 623,803 721,928 868,520 1,026,297 Total Assets 343,815 427,936 572,817 602,907 749,533 860,371 1,015,789 1,180,410
TCS
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Financials and Valuations Ratios Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Basic (INR) EPS 54.4 71.2 97.6 110.8 123.2 135.2 145.3 158.4 Cash EPS 59.0 76.7 104.4 120.3 132.5 145.3 155.1 169.3 Book Value 166.7 209.7 282.5 293.4 371.4 427.6 505.5 588.4 DPS 25.0 22.0 32.0 79.0 43.4 46.5 55.7 62.5 Payout (incl. Div. Tax.) 46.0 30.9 32.8 71.3 35.2 34.4 38.4 39.5
Valuation(x) P/E 21.0 18.9 17.2 16.0 14.7 Cash P/E 19.3 17.5 16.0 15.0 13.7 Price / Book Value 7.9 6.3 5.4 4.6 3.9 EV/Sales 4.6 4.0 3.6 3.1 2.7 EV/EBITDA 16.0 14.0 12.9 11.3 10.1 Dividend Yield (%) 3.4 1.9 2.0 2.4 2.7 Profitability Ratios (%) RoE 36.7 37.8 39.7 38.5 37.1 33.8 31.1 29.0 RoCE 35.1 36.5 38.6 37.8 36.8 32.7 29.4 27.2 RoIC 40.8 42.4 52.2 50.2 51.9 49.0 49.3 48.2 Turnover Ratios (%) Fixed Asset Turnover (x) 8.4 8.6 8.8 8.6 9.3 9.4 9.6 10.0 Debtors (No. of Days) 86.9 89.8 88.1 89.7 87.9 90.7 90.2 91.4 Leverage Ratios (%) Net Debt/Equity (x) -0.1 -0.2 -0.3 -0.3 -0.4 -0.4 -0.4 -0.5
Cash Flow Statement (INR Million) Y/E Mar 2012 2013 2014 2015 2016 2017E 2018E 2019E Adjusted EBITDA 144,177 180,870 251,322 272,941 306,780 327,642 367,801 397,516 Non cash opr. exp (inc) -28,759 -30,664 -46,910 -57,762 -45,755 -41,442 -62,229 -63,990(Inc)/Dec in Wkg. Cap. -49,352 -13,501 12,834 25,257 -32,355 -58,999 -37,214 -24,220CF from Op. Activity 66,066 136,704 217,246 240,437 228,670 227,202 268,358 309,305
(Inc)/Dec in FA & CWIP -41,584 -6,733 -64,233 -49,941 -38,294 -20,777 -45,026 -45,384Free cash flows 24,483 129,971 153,012 190,496 190,376 206,426 223,333 263,922 (Pur)/Sale of Invt 18,390 -33,765 -3,909 30,391 -548 5,161 0 0 CF from Inv. Activity -23,193 -40,498 -68,142 -19,550 -38,842 -15,616 -45,026 -45,384
Inc/(Dec) in Net Worth 0 0 0 0 12,778 -45,006 0 0 Inc / (Dec) in Debt 1,588 -1,412 1,666 6,444 -4,913 270 2,001 1,356 Divd Paid (incl Tax) & Others -57,246 -50,377 -73,310 -186,113 -103,385 -110,793 -132,791 -148,915CF from Fin. Activity -55,658 -51,788 -71,643 -179,670 -95,519 -155,530 -130,790 -147,559
Inc/(Dec) in Cash -12,785 44,418 77,461 41,217 94,309 56,057 92,543 116,362
Add: Opening Balance 47,401 34,616 79,034 156,494 197,712 292,020 348,077 440,620 Closing Balance 34,616 79,034 156,494 197,712 292,020 348,077 440,620 556,982
TCS
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Corporate profile Exhibit 1: Sensex rebased
Source: MOSL/Bloomberg
Exhibit 2: Shareholding pattern (%) Sep-16 Jun-16 Sep-15
Promoter 73.3 73.3 73.9
DII 5.2 5.2 8.9
FII 17.0 17.0 12.7
Others 4.5 4.5 4.5
Note: FII Includes depository receipts Source: Capitaline
Exhibit 3: Top holders Holder Name % Holding
LIC of India 3.2
Source: Capitaline
Exhibit 4: Top management Name Designation
Ishaat Hussain Chairman
N Chandrasekaran Managing Director & CEO
Suprakash Mukhopadhyay Company Secretary
Source: Capitaline
Exhibit 5: Directors Name Name
Aarthi Subramanian P A Vandrevala
Aman Mehta Clayton M Christensen
O P Bhatt Ron Sommer
V Thyagarajan Vijay Kelkar
*Independent
Exhibit 6: Auditors Name Type
Deloitte Haskins & Sells LLP Statutory
Source: Capitaline
Exhibit 7: MOSL forecast v/s consensus EPS (INR)
MOSL forecast
Consensus forecast
Variation (%)
FY17 135.2 132.6 2.0
FY18 145.3 143.5 1.3
Source: Bloomberg
Company description TCS is the largest IT services company in India, with (LTM) revenue of over USD17.1b. It employs over 371,000 people and provides IT and BPO services to over 1,000 global clients. It is one of the preferred IT vendors for most Fortune 500/Global 1,000 companies.
TCS
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