1QFY2017 Result Update | IT
July 21, 2016
Tata Consultancy Services (TCS)
BUY
CMP
`2,493
Performance highlights
Target Price
`2,867
(` cr)
1QFY17 4QFY16
% chg (qoq) 1QFY16
% chg (yoy)
Investment Period
12 Months
Net revenue
29,305
28,449
3.0
25,668
14.2
Adj. EBITDA
7,065
7,883
(10.4)
6,982
1.2
Stock Info
Adj. EBITDA margin (%)
26.7
27.7
(50)bp
27.2
(50)bp
Sector
IT
Adj. PAT
6,317
6,341
(0.4)
5,709
10.6
Market Cap (` cr)
491,277
Source: Company, Angel Research
Net Debt (` cr)
(14,442)
Beta
0.6
TCS posted a 3.7% sequential growth in USD revenues to US$4,362mn for
52 Week High / Low
2,769/2,119
1QFY2017 (V/s US$4,375mn expected), which was mostly volume led (3.4%
Avg. Daily Volume
71,114
qoq growth). On constant currency (CC) basis, the revenue growth is of 3.1%
Face Value (`)
1
qoq. On the operating front, the EBITDA and EBIT margins came in at 26.7%
BSE Sensex
27,916
and 25.1%, a dip of ~97bp and ~98bp qoq respectively, which is mostly in line
Nifty
8,566
with our expectations. Consequently, the PAT came in at `6,317cr (V/s `6,151cr
expected), a de-growth of 0.4% qoq. We maintain our Buy on the stock.
Reuters Code
TCS.BO
Bloomberg Code
[email protected]
Quarterly highlights: The company posted a 3.7% sequential growth in USD
revenues to US$4,362mn for 1QFY2017 (V/s US$4,375mn expected), which
was mostly volume led (3.4% qoq growth). On constant currency (CC) basis, the
Shareholding Pattern (%)
revenue growth is of 3.1% qoq. In terms of geography, USA posted a CC qoq
Promoters
73.3
growth of 2.5%, while Latin America posted CC qoq growth of 0.3%. In terms of
MF / Banks / Indian Fls
5.5
verticals, its key industries BFSI, Retail & CPG, and Manufacturing posted a CC
FII / NRIs / OCBs
17.0
qoq growth of 1.7%, 2.7%, and 3.1%, respectively. On the operating front, the
Indian Public / Others
4.2
EBITDA and EBIT margins came in at 26.7% and 25.1%, a dip of ~97bp and
~98bp qoq respectively, which is mostly in line with our expectations.
Consequently, the PAT came in at `6,317cr (V/s `6,151cr expected), a de-
Abs.(%)
3m 1yr
3yr
growth of 0.4% qoq.
Sensex
8.0
(1.8)
38.5
TCS
1.7
(3.3)
43.1
Outlook and valuation: With headwinds from Diligenta and Latin America
behind, still an uncertain BFSI may mar the company’s growth (although the
same is not currently being encountered). However, even on conservative
3-Year Daily Price Chart
estimates, we expect TCS to post a revenue CAGR of 12.0% in USD as well as
INR terms over FY2016-18E. The stock trades at 16.6x its FY2018E EPS, which is
attractive.
Key financials (Consolidated, IFRS)
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
Net sales
94,648
1,08,646
1,21,684
1,36,286
% chg
15.7
14.8
12.0
12.0
Net profit
21,696
24,215
26,432
29,369
% chg
13.5
11.6
9.2
11.1
EBITDA margin (%)
28.2
28.3
27.3
27.3
EPS (`)
110.9
123.7
135.0
150.1
Source: Company, Angel Research
P/E (x)
22.5
20.2
18.5
16.6
P/BV (x)
8.5
6.7
6.1
5.6
RoE (%)
34.2
33.1
33.2
33.9
RoCE (%)
33.9
31.6
26.9
27.5
Sarabjit kour Nangra
EV/Sales (x)
4.9
4.2
3.6
3.2
+91 22 3935 7800 Ext: 6806
EV/EBITDA (x)
17.3
14.9
13.2
11.5
sarabjit @angelbroking.com
Source: Company, Angel Research; Note: CMP as of July 20, 2016
Please refer to important disclosures at the end of this report
1
TCS | 1QFY2017 Result Update
Exhibit 1: 1QFY2017 performance (Consolidated, IFRS)
(` cr)
1QFY17
4QFY16
% chg (qoq)
1QFY16
% chg (yoy)
FY2016
FY2015
% chg(yoy)
Net revenue
29,305
28,449
3.0
25,668
14.2
1,08,646
94,648
14.8
Cost of revenue
16,312
15,592
4.6
13,984
16.6
59,459
53,227
11.7
Gross profit
12,993
12,857
1.1
11,684
11.2
49,187
41,421
18.7
SG&A expense
5,156
4,975
3.6
4,452
15.8
18,956
17,353
9.2
EBITDA
7,837
7,883
(0.6)
7,232
8.4
30,231
24,068
25.6
Dep. and amortisation
490
471
4.1
484
1.2
1,441
1,272
13.3
EBIT
7,347
7,412
(0.9)
6,748
8.9
28,790
22,796
26.3
Other income
963
905
6.4
771
24.9
3,050
3,140
PBT
8,310
8,317
(0.1)
7,519
10.5
31,840
25,936
22.8
Income tax
1,992
1,970
1,747
14.0
7,503
6,083
23.3
PAT
6,318
6,347
(0.5)
5,772
9.5
24,338
19,853
22.6
Earnings in affiliates
-
-
-
-
-
-
-
-
Minority interest
1
6
(82.1)
64
(98.4)
123
205
(40.1)
Reported PAT
6,317
6,341
(0.4)
5,709
10.6
24,215
19,648
23.2
Adj. PAT
6,317
6,341
(0.4)
5,709
10.6
24,215
21,696
11.6
EPS
32.1
32.2
(0.4)
29.1
10.2
123.2
110.8
11.2
Gross margin (%)
44.3
45.2
(86)bp
45.5
(118)bp
45.3
43.8
151bp
EBITDA margin (%)
26.7
27.7
(97)bp
28.2
(143)bp
27.8
25.4
240bp
EBIT margin (%)
25.1
26.1
(98)bp
26.3
(122)bp
26.5
24.1
241bp
Source: Company, Angel Research
Exhibit 2: Actual vs Angel estimates
(` cr)
Actual
Estimate
Var. (%)
Net revenue
29,305
29,362
(0.2)
EBIT margin (%)
25.1
25.1
1.1bps
Adj. PAT
6,317
6,151
2.7
Source: Company, Angel Research
Numbers mostly in line of expectations
TCS posted sales in line of expectations for the quarter, while it outperformed on
the net profit front on back of higher than expected EBIT and other income. The
company posted a 3.7% sequential growth in USD revenues to US$4,362mn (V/s
US$4,375mn expected), which was mostly volume led (3.4% qoq growth). On CC
basis, the company posted a revenue growth of 3.1% qoq; while in INR terms
revenues grew 3.0% qoq to `29,305cr (V/s `29,362cr expected).
In terms of geography, USA and Latin America grew 2.5% qoq and 0.3% qoq
(CC), respectively. In Europe - UK grew 3.8% qoq (CC) while Continental Europe
grew 4.6% qoq (CC). India posted an 8.5% CC qoq growth.
In terms of verticals, BFSI posted a CC qoq growth of 1.7%, Retail & CPG posted a
CC qoq growth of 2.7%, Communication & Media posted a CC qoq growth of
7.0%, Manufacturing posted a CC qoq growth of 3.1%, Life Sciences & Healthcare
posted a CC qoq growth of 3.9%, Energy & Utilities posted a CC qoq growth of
7.4%, Travel & Hospitality posted a CC qoq growth of 8.6% and Hi-Tech posted a
CC qoq de-growth of 0.3%.
July 21, 2016
2
TCS | 1QFY2017 Result Update
Exhibit 3: Trend in volume and revenue growth (qoq)
8
7
6
4.8
4.9
5
3.7
4
3.2
3
3.5
3.4
3.0
2
0.7
1
1.5
0.4
0
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
(1)
Volume growth
Revenue growth (USD terms)
Source: Company, Angel Research
Exhibit 4: Revenue drivers for 4QFY2016
4
3.7
3.4
3
2
1
0.6
0
(0.3)
(1)
Volume
Currency impact
CC realization
Total revenue growth
Source: Company, Angel Research
BFSI growth lagged remaining business, owing to an uncertain macro
environment; the company expressed that the potential ramifications of the Brexit
on BFSI are still not totally clear. Digital continued showing strength as it grew by
6.4% qoq to US$694mn and accounted for 15.9% of total revenue during the
quarter.
July 21, 2016
3
TCS | 1QFY2017 Result Update
Exhibit 5: Revenue growth (Industry wise on CC basis)
% to revenue
% chg (CC qoq)
% chg (yoy)
BFSI
40.4
1.7
10.1
Manufacturing
10.4
3.1
13.9
Telecom & Media
11.3
7.0
13.0
Life sciences and healthcare
7.3
3.9
15.6
Retail and distribution
14.0
2.7
11.1
Transportation & Hospitality
3.9
8.6
21.0
Energy and utilities
4.2
7.4
19.3
Hi-tech
5.4
(0.3)
(0.2)
Others
3.1
3.0
(20.7)
Source: Company, Angel Research
July 21, 2016
4
TCS | 1QFY2017 Result Update
Service line wise, Infrastructure Services reported a sequential growth of 5.4% on
CC basis. In the company’s anchor service line - IT Solutions and Services - ADM
grew 0.4% qoq on CC basis, and Enterprise Solutions and Assurance Services
grew by 6.7% qoq and 3.2% qoq on a CC basis. The BPO segment grew by 2.8%
qoq on a CC basis during the quarter. Asset Leveraged Solutions (3.2% of sales)
grew by 2.5% qoq on CC basis.
Exhibit 6: Revenue growth (Service wise on CC basis)
% to revenue
% chg (CC qoq)
% chg (yoy)
IT solutions and services
ADM
38.5
0.4
4.9
Enterprise solutions
17.7
6.7
8.1
Assurance services
8.8
3.2
14.8
Engg. and industrial services
4.8
7.0
18.4
Infrastructure services
15.5
5.4
15.4
Asset-leveraged solutions
3.2
2.5
42.4
BPO
11.5
2.8
11.2
Source: Company, Angel Research
Geography wise, growth in INR sales in key geographies was as follows: - USA
(2.5% qoq on CC basis), Latin America (0.3% qoq on CC basis), Continental
Europe (3.8% qoq on CC basis), India (8.5% qoq on CC basis) and MEA (3.3%
qoq on CC basis). The UK and Asia Pacific posted a growth of
3.8% qoq and 1.3% qoq on CC basis, respectively.
Exhibit 7: Revenue growth (Geography wise in INR terms)
% of revenue
% chg (CC qoq)
% chg (yoy)
U.S.
53.5
2.5
9.7
Latin America
2.0
0.3
24.3
U.K.
14.8
3.8
7.4
Continental Europe
11.5
4.6
12.9
India
6.2
8.5
11.6
Asia Pacific
9.6
1.3
7.7
MEA
2.4
3.3
20.0
Source: Company, Angel Research
Attrition rate declines
In 1QFY2017, TCS witnessed a gross addition of 17,792 employees and net
addition of 8,236 employees, taking its total employee base to 3,62,079. During
the quarter, the attrition rate (last twelve month [LTM] basis) for the company
decreased to 13.6% from 14.7% in 4QFY2016.
Exhibit 8: Hiring and attrition trend
Particulars
1QFY16 2QFY16
3QFY16
4QFY16
1QFY17
Gross addition
25,186
25,186
22,118
22,576
17,792
Net addition
5,279
10,685
9,071
9,152
8,236
Total employee base
3,24,935
3,35,620
3,44,691
3,53,843
3,62,079
Attrition (%) - LTM basis
15.9
16.2
15.9
14.7
13.6
Source: Company, Angel Research
July 21, 2016
5
TCS | 1QFY2017 Result Update
Margin dips
On the operating front, the EBITDA and EBIT margins came in at 26.7% and
25.1% a dip of ~97bp and ~98bp qoq respectively, which is more or less in line
with our expectations. Margins breakup for the quarter was as follows - wage hikes
(-200bp), currency movement (-20bp) and others (+120bp).
Exhibit 9: Adj. Margin profile
34
32
30
28.9
28.1
28.3
27.7
28
26.7
26
27.1
26.6
26.3
26.1
24
25.1
22
20
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
EBITDA margin
EBIT margin
Source: Company, Angel Research
Client metrics
The client pyramid during the quarter witnessed a qualitative improvement with
client additions seen in higher revenue brackets. The clients in $50mn+ revenue
band increased by 4, in $20mn+ revenue band by 2 and in $5mn+ revenue
band by 10.
Exhibit 10: Client pyramid
1QFY16 2QFY16 3QFY16 4QFY16 1QFY17
US$1mn-5mn
391
415
425
400
408
US$5mn-10mn
123
130
132
131
141
US$10mn-20mn
96
103
108
125
119
US$20mn-50mn
103
106
108
100
102
US$50mn-100mn
39
32
31
36
40
US$100mn plus
30
33
34
37
37
Source: Company, Angel Research
July 21, 2016
6
TCS | 1QFY2017 Result Update
Investment Argument
Guidance - Outlook unchanged: The Management refrained from giving any
additional color on FY2017E revenue growth outlook, but expects FY2017 to be
better than FY2016 as most of the headwinds (like Diligenta and Japan’s
underperformance) that were effecting the company’s growth in FY2016, seem to
be diminishing. However uncertainty on back of the Brexit and its impact could
impair growth in the near term, though the Management expects ramp up in deal
execution. We expect the company to post a US$ revenue CAGR of 12.0% over
FY2016-18E.
Deal pipeline outlook healthier: The company has given a positive outlook for
FY2017. It expects a strong demand environment across the board in most areas
that it focuses on. TCS, post 4QFY2016, is in a much better position relative to the
end of FY2015. The key reasons behind the same are - dramatic acceleration in
the adoption of digital technologies; good resilience and strong momentum in
BFSI, North America and Continental Europe; major headwinds of Diligenta,
Insurance vertical, Japan and Latin America are now behind; strong order book
and pipeline; and robust growth in platforms.
Outlook and valuation
Over FY2016-18E, we expect TCS’ revenue to post a CAGR of 12.0% in
USD and INR terms. The company highlighted that it stands comfortable of
sustaining the EBIT margin in the range of
26-28%. On the
EBIT and PAT fronts, we expect the company to post an 11.1% and 10.1% CAGR
over FY2016-18E, respectively. The stock is trading at 16.6x FY2018E EPS of
`150. We maintain our Buy rating on the stock with a target price of `2,867.
Exhibit 11: Key assumptions
FY2017E
FY2018E
Revenue growth (USD)
12.0
12.0
USD-INR rate (realized)
65.7
65.7
Revenue growth (`)
12.0
12.0
EBITDA margin (%)
27.3
27.3
Tax rate (%)
23.5
23.5
EPS growth (%)
9.2
11.1
Source: Company, Angel Research
July 21, 2016
7
TCS | 1QFY2017 Result Update
Exhibit 12: One-year forward PE chart
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Price
25x
21x
16x
11x
6x
Source: Company, Angel Research
Exhibit 13: Recommendation summary
Company
Reco
CMP Tgt. price Upside
FY2018E FY2018E
FY2016-18E
FY2018E FY2018E
(`)
(`)
(%)
EBITDA (%)
P/E (x)
EPS CAGR (%)
EV/Sales (x)
RoE (%)
HCL Tech
Buy
729
1,000
37.2
20.5
11.4
9.6
1.2
17.9
Infosys
Buy
1,083
1,370
26.5
27.5
15.0
10.4
2.6
22.3
TCS
Buy
2,493
2,867
15.0
27.3
16.6
10.1
3.2
33.9
Tech Mahindra
Buy
505
700
38.6
17.0
12.2
13.2
1.2
20.7
Wipro
Buy
539
680
26.1
23.8
11.8
9.9
1.5
19.6
Source: Company, Angel Research
July 21, 2016
8
TCS | 1QFY2017 Result Update
Company background
TCS is Asia's largest IT services provider and is amongst the top 10 technology
firms in the world. The company has a global footprint with an employee base of
over 3.0 lakh professionals, offering services to more than 1,000 clients across
various industry segments. The company has one of the widest portfolios of
services offerings, spanning across the entire IT service value chain - from
traditional application development and maintenance to consulting and package
implementation to products and platforms.
July 21, 2016
9
TCS | 1QFY2017 Result Update
Profit & Loss statement (Consolidated, IFRS)
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017E FY2018E
Net sales
81,809
94,648
1,08,646
1,21,684
1,36,286
Cost of revenue
42,207
50,599
58,952
65,709
73,594
Gross profit
39,603
44,049
49,695
55,975
62,691
% of net sales
48.4
46.5
45.7
46.0
46.0
SGA expenses
14,471
17,353
18,956
22,755
25,485
% of net sales
17.7
18.3
17.4
18.7
18.7
EBITDA
25,132
26,696
30,738
33,220
37,206
% of net sales
30.7
28.2
28.3
27.3
27.3
Dep. and amortization
1324
1272
1948
1535
1655
% of net sales
1.6
1.3
1.8
1.3
1.2
EBIT
23,808
25,424
28,790
31,685
35,551
% of net sales
29.1
26.9
26.5
26.0
26.1
Other income, net
1589
3140
3050
3050
3050
Profit before tax
25,397
28,564
31,840
34,735
38,601
Provision for tax
6,071
6,083
7,503
8,163
9,071
% of PBT
23.9
21.3
23.6
23.5
23.5
PAT
19,326
22,481
24,338
26,572
29,530
Minority interest
209
205
123
141
161
Extra-ordinary (Exp.)/ Inc.
-2627.9
Reported PAT
19,117
19,648
24,215
26,432
29,369
Adj. PAT
19,117
21,696
24,215
26,432
29,369
Diluted EPS (`)
97.6
110.9
123.7
135.0
150.1
July 21, 2016
10
TCS | 1QFY2017 Result Update
Balance sheet (Consolidated, IFRS)
Y/E March (` cr)
FY2014 FY2015
FY2016 FY2017E FY2018E
Assets
Cash and cash equivalents
1,469
1,862
1,862
1,267.2
939.0
Other current financial assets
18,107
16,383
4,833
27,366
35,229
Accounts receivable
18,230
20,440
24,073
26,272
29,424
Unbilled revenues
4,006
3,827
3,992
5,347
5,348
Other current assets
-
6,414
5,975
5,975
5,975
Property and equipment
10,364
11,572
11,790
12,790
13,790
Intangible assets and goodwill
4,157
3,931
3,946
3,946
3,946
Investments
3,449
9,619
22,822
22,822
22,822
Other non current assets
-
906
11,919
11,919
11,919
Total assets
68,913
74,954
91,212
1,17,704
1,29,393
Liabilities
Current liabilities
10,906
14,428
15,407
35,112
39,325
Short term borrowings
170
243
162
162
162
Redeemable preference shares
-
-
(0)
-
1
Long term debt
127
114
83
83
83
Other non current liabilities
1,684
1,778
2,017
2,333
2,613
Minority interest
691
914
354
495
656
Shareholders funds
55,335
57,477
73,190
79,520
86,554
Total liabilities
68,913
74,954
91,212
1,17,704
1,29,393
July 21, 2016
11
TCS | 1QFY2017 Result Update
Cash flow statement (Consolidated, IFRS)
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017E
FY2018E
Pre-tax profit from oper.
23,808
22,481
24,338
26,572
29,530
Depreciation
1,324
1,272
1,948
1,535
1,655
Exp. (deferred)/written off
209
160
174
-
-
Pre tax cash from oper
24,923
23,913
26,460
28,107
31,185
Other inc./prior period ad
1,589
1,272
1,948
1,535
1,655
Net cash from operations
26,512
25,185
28,408
29,642
32,840
Tax
6,071
6,083
7,503
8,163
9,071
Cash profits
20,441
19,102
20,905
21,479
23,768
(Inc)/dec in acc. recv.
(4,154)
(2,210)
(3,633)
(2,199)
(3,153)
(Inc)/dec in unbilled rev.
(846)
179
(165)
(1,355)
(1)
(Inc)/dec in oth. current asst.
(6,650)
(6,414)
439
-
-
Inc/(dec) in current liab.
2,223
(1,207)
(218)
(1,000)
(1,000)
Net trade working capital
(9,427)
(9,652)
(3,577)
(4,554)
(4,154)
Cash flow from opert. actv.
11,015
9,450
17,328
16,925
19,615
(Inc)/dec in fixed assets
(3,494)
(1,207)
(218)
(1,000)
(1,000)
(Inc)/dec in investments
(1,409)
(4,446)
(1,653)
(22,533)
(7,863)
(Inc)/dec in intangible asst.
(651)
(226)
16
-
-
(Inc)/dec in non-cur.asst.
(1,335)
(906)
(11,013)
-
-
Cash flow from invt. actv.
(6,889)
(6,786)
(12,869)
(23,533)
(8,863)
Inc/(dec) in debt
203
61
(113)
-
-
Inc/(dec) in equity
34
223
(559)
141
161
Inc/(dec) in minority int.
(14,666)
(19,923)
(18,415)
(20,101)
(22,335)
Dividends
9,929
17,369
14,629
26,622
11,989
Cash flow from finan. actv.
(4,500)
(2,271)
(4,459)
6,661
(10,185)
Cash generated/(utilized)
(374)
393
-
(595)
(328)
Cash at start of the year
1,843
1,469
1,862
1,862
1,267
Cash at end of the year
1,469
1,862
1,862
1,267
939
July 21, 2016
12
TCS | 1QFY2017 Result Update
Key ratios
Y/E March
FY2014
FY2015
FY2016
FY2017E
FY2018E
Valuation ratio(x)
P/E (on FDEPS)
25.5
22.5
20.2
18.5
16.6
P/CEPS
23.9
23.3
18.7
17.5
15.7
P/BVPS
8.8
8.5
6.7
6.1
5.6
Dividend yield (%)
1.3
1.7
1.6
1.8
2.0
EV/Sales
5.7
4.9
4.2
3.6
3.2
EV/EBITDA
18.5
17.3
14.9
13.2
11.5
EV/Total assets
6.8
6.1
5.0
3.7
3.3
Per share data (`)
EPS
97.6
110.9
123.7
135.0
150.1
Cash EPS
104.4
106.8
133.6
142.8
158.4
Dividend
32.0
43.5
40.2
43.9
48.7
Book value
283
294
374
406
442
Dupont analysis
Tax retention ratio (PAT/PBT)
0.8
0.8
0.8
0.8
0.8
Cost of debt (PBT/EBIT)
1.1
1.1
1.1
1.1
1.1
EBIT margin (EBIT/Sales)
0.3
0.3
0.3
0.3
0.3
Asset turnover ratio (Sales/Assets)
1.2
1.3
1.2
1.0
1.1
Leverage ratio (Assets/Equity)
1.2
1.3
1.2
1.5
1.5
Operating ROE
34.9
39.1
33.3
33.4
34.1
Return ratios (%)
RoCE (pre-tax)
34.5
33.9
31.6
26.9
27.5
Angel RoIC
51.9
54.0
46.7
47.8
50.5
RoE
34.5
34.2
33.1
33.2
33.9
Turnover ratios(x)
Asset turnover (fixed assets)
7.9
8.2
9.2
9.5
9.9
Receivables days
81
79
81
79
79
July 21, 2016
13
TCS | 1QFY2017 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
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/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public
offering of securities of the company covered by Analyst during the past twelve months.
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contrary view, if any.
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Disclosure of Interest Statement
TCS
1. Financial interest of research analyst or Angel or his Associate or his relative
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15)
July 21, 2016
14