TATA CONSULTANCY SERVICES Ltd Result Update: Q4 FY 11

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1 TATA CONSULTANCY SERVICES Ltd Result Update: Q4 FY 11 C.M.P: Rs Target Price: Rs Date: April 28 th 2011 BUY Stock Data: Sector: IT Face Value Rs wk. High/Low (Rs.) 1,247.00/ Volume (2 wk. Avg.) 5,84,000 BSE Code Market Cap (Rs.In mn) Share Holding Pattern 1 Year Comparative Graph TCS Ltd BSE SENSEX SYNOPSIS TCS is the largest software company in Asia, having a wide range of offerings. Added 37 clients in the financial year FY11. During the quarter TCS wins a multi-year, multi-million dollar contract to provide application support, maintenance and development services to a world leader in industrial gases. During the quarter TCS wins a multi-year deal to provide end-to-end IT infrastructure services from Royal Haskoning. During the quarter du, the integrated telecom service provider in the United Arab Emirates Signs a five years Agreement with TCS. During the quarter TCS had launched ion the first-of-its-kind fully integrated information technology solution for Small and Medium Business (SMB). Total head count of the company as on Mar. 31, 2011 stood at 198,614 with utilization rate at 82.4%. 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 (%) Tata Consultancy Services Ltd Infosys Technologies HCL Technologies Wipro Technologies Investment Highlights Q4 FY11 Results Update During the quarter, the company disclosed a Consolidated profit of Rs million as against of Rs million for the quarter ended March 31, Net sales are increased by 31% to Rs million from Rs million in the same quarter previous year. In the same period, consolidated total income of the company was at Rs million, a rise of 31% over the prior year period. Company EPS is stood at Rs for the quarter ended March Quarterly Results - Consolidated (Rs in mn) As at 11-Mar 10-Mar %Change Net Sales Net Profit Basic EPS

3 FY11 Performance in line with expectation The Company s Top line has increased 24% to Rs mn from Rs mn of FY10. Bottom line for the year increased 30% to Rs mn. from Rs mn of FY10. These numbers are in line with our expectation. Earnings per share of the company for the year stood at Rs per share. Expenditure of the company for the year stood at Rs mn, which is around 23% higher than FY10. Interest increased 64%YoY to Rs mn, and depreciation also increased 11%YoY to Rs mn. TCS Secures multi year contract from Air Liquide TCS has entered into a multi-year, multi-million dollar contract to provide application development and maintenance services to Air Liquide USA LLC, a subsidiary of Air Liquide Group, the world leader in gases for industry, health and the environment. TCS provides core banking system to CUA Tata Consultancy Services BaNCS has entered into an agreement to deliver CUA s new core banking system. CUA, Australia s largest customer-owned 3

4 financial institution. CUA will revolutionize its core banking system and back office processes over the next two years to provide greater flexibility and integration across the business and deliver an enhanced customer experience. TCS has set up new Learning and Development Center in Hyderabad Tata Consultancy Services was setting up first learning and development center for campus trainees in Hyderabad. Equipped to train 6,000 professionals annually, the new center will offer TCS leading edge learning curriculum over a three-month period to candidates joining TCS straight out of colleges. TCS sets new benchmark in Quality; First software firm to be assessed at Level 5 enterprise-wide in software services and development The company announced that it has been assessed enterprise-wide, at the highest maturity Level 5 of the Capability Maturity Model Integration for CMMI -DEV (Development) and CMMI -SVC (Services) models. With this achievement, TCS sets a new benchmark as the first publicly stated recipient to achieve a Multiple Simultaneous Appraisal against two constellations of the CMMI model. TCS is also the first organization in the world, to be appraised at Level 5 of the CMMI -SVC model, which underscores the maturity of the firm s fast growing Business Process Outsourcing (BPO) and Infrastructure Services business Royal Haskoning signs Multi-Year agreement with TCS Tata Consultancy Services has entered into an agreement with Royal Haskoning to provide end-to-end IT infrastructure services, which will be provided from TCS global delivery centers in the Netherlands, Hungary and India. For this both the companies have signed a multi-year, multi-million IT infrastructure deal. Law Society selects TCS as a strategic transformation partner The Law Society of England and Wales has chosen Tata Consultancy Services as a strategic transformation partner, following a diligent process of evaluation. TCS will work with The Law Society initially on a significant system development project, which aims to create a more effective online service for The Law Society and its members. Puducherry selects TCS for its State Data Center project 4

5 Tata Consultancy Services had won a contract for establishing and managing the State Data Centre (SDC) for the state of Puducherry. The SDC, which was earlier inaugurated by Sachin Pilot, Honorable Minister of State for Communications & Information Technology, Government of India is ready for commissioning. Nedbank selects TCS BaNCS Securities Processing for Custodial Operations Nedbank Investor Services (NIS), a division of Nedbank Limited, has selected the TCS BaNCS suite of products to replace its existing securities and custodial applications. ion brings the power of world-class technology to India s SMBs TCS has launched ion - the first-of-its-kind fully integrated information technology solution for Small and Medium Business (SMB). The company s portfolio of business solutions for SMBs on the cloud- ion- was launched into the market in the 4 th quarter of FY11. The unique solution stack addresses the end-to-end technology requirements of small and medium business units. The solutions have been received well by the market. The company has acquired 225+ customers across India since it was launched in du selects TCS as an IT Managed Services partner Tata Consultancy Services has signed a five-year contract with du, the integrated telecom service provider in the United Arab Emirates. As an IT Managed Services partner, TCS will support du in its efforts to enhance customer excellence and service delivery levels. TCS BaNCS Launches Mobile Trading in India TCS BaNCS Securities Trading went operational with its mobile trading application with a leading financial services provider. With this implementation, TCS BaNCS becomes one of the first IT solution providers to deploy its mobile trading solution in India, the bastion of the exchanges until now. Dividend on Redeemable Preference Shares TCS has recommended a Dividend of 11 paise on Redeemable Preference Share of Rs. 1 each at its annual general meeting. 5

6 Company Profile TCS is part of the Tata group, one of India s largest industrial conglomerates and most respected brands. Tata Consultancy Services is an IT services, business solutions and outsourcing organization that delivers real results to global businesses, ensuring a level of certainty that 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 (GNDM ), recognized as the benchmark of excellence in software development. TCS has over 198,500 of the world s best-trained IT consultants in 42 countries. Revenue of $8.2 billion (fiscal year ending March 31, 2011). TCS has nine non-executive and three executive board members. Awards TCS mkrishi wins Nasscom Social Innovation Honors 2010 TCS wins Golden Peacock Award 2010 TCS wins 2010 Global Most Admired Knowledge Enterprises (MAKE) Individual Operating Unit Award Quality Framework: TCS is the world s first organization to achieve an enterprisewide Maturity Level 5 on CMMI and P-CMM based on SCAMPI SM, the most rigorous assessment methodology. Subsidiaries TCS has 20 directly-held and 37 indirectly-held subsidiaries. Company Services are as follows TCS offers a wide range of services in many industries such as Banking & Financial Services Energy, Resources & Utilities Government Life Sciences and Healthcare High Tech 6

7 Insurance Manufacturing Media & Information Services Retail & Consumer Products Telecom Travel, Transportation & Hospitality Services Offerings 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 Business Intelligence & Performance Management Engineering & Industrial Services Small and Medium Business Connected Marketing Solutions Software TCS BaNCS TCS Technology Products Other Products 7

8 inancials 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 Depreciation Profit Before Tax Tax Profit After Tax Minority Interest Net Profit Equity capital Reserves Face Value Total No. of Shares EPS

9 Quarterly Ended Profit & Loss Account (Consolidated) Value(Rs.in.mn) 30-Sep Dec Mar Jun-11E 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 Net Profit Equity capital Face Value Total No. of Shares EPS

10 Key Ratios Particulars FY10 A FY11 A FY12 E FY13 E EBIDTA % 30% 32% 31% 31% PAT % 24% 25% 24% 24% P/E ratio (x) ROE - % 38% 37% 30% 27% ROCE - % 45% 45% 37% 32% EV/EBIDITA (x) Debt Equity Ratio Book Value (Rs.) Price/Book Value Charts: Netsales & PAT 10

11 P/E Ratio(X) EV/EBITDA(x) 11

12 P/BV(x) 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 20% and 22% 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 6.49 x and 4.76 x respectively for FY12E and FY13E. TCS sets new benchmark in Quality; First software firm to be assessed at Level 5 enterprise-wide in software services and development TCS wins a multi-year, multi-million dollar contract to provide application support, maintenance and development services to a world leader in industrial gases. 12

13 TCS wins a multi-year deal to provide end-to-end IT infrastructure services from Royal Haskoning. TCS had launched ion - the first-of-its-kind fully integrated information technology solution for Small and Medium Business (SMB). The company had won a contract for establishing and managing the State Data Center (SDC) for the state of Puducherry. Law Society of England and Wales selects TCS as a strategic transformation partner. 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. Industry Overview Sector structure/market size The Indian information technology industry has played a key role in putting India on the global map. Thanks to the success of the IT industry, India is now a power to reckon with. According to the National Association of Software and Service Companies (NASSCOM), the apex body for software services in India, the revenue of the information technology sector has risen from 1.2 per cent of the gross domestic product (GDP) in FY to an estimated 5.8 per cent in FY India's IT growth in the world is primarily dominated by IT software and services such as Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, Infrastructure Management Services, Software testing, Service-oriented architecture and Web services. As per NASSCOM's latest findings: Indian IT-BPO sector grew by 12 per cent in FY 2009 to reach US$ 71.7 billion in aggregate revenue (including hardware). Of this, the software and services segment accounted for US$ 59.6 billion. IT-BPO exports (including hardware exports) grew by 16 per cent from US$ 40.9 billion in FY to US$ 47.3 billion in FY

14 Moreover, according to a study by Springboard Research, the Indian IT services market is estimated to remain the fastest growing in the Asia-Pacific region with a CAGR of 18.6 per cent. Despite the uncertainty in the global economy, the top three IT majors Infosys, TCS and Wipro have seen revenue growth from all important sources of income: from the North American and European regions, in the financial services vertical and from application maintenance and development (ADM) offerings between fiscal years 2008 and At present, there are 60 million Internet users in the country. According to Manufacturer s Association of IT (MAIT), the number of active Internet entities rose to 8.6 million by March 2009 from 7.2 million units in March 2008.MAIT has outlined 'Goal 511', an ambitious target that talks about 500 million Internet users, 100million broadband connections, and 100 million connected devices by 2012.A latest study by MAIT estimated that the total PC sale in India is likely to grow by 7per cent in , with total sales expected to cross 7.3 million units. Outsourcing A research by Gartner forecasts India as the undisputed leader in the outsourcing space in the year India's most prized resource is its readily available technical work force. India has the second largest English-speaking scientific professionals in the world, second only to the US. It is estimated that India has over 4 million technical workers, over 1,832 educational institutions and polytechnics, which train more than 67,785 computer software professionals every year. The enormous base of skilled manpower is a major draw for global customers. According to NASSCOM, software and services exports (including exports of IT services, BPO, engineering services and R&D and software products) reached US$ 47 billion in FY , contributing nearly 78 per cent to the total software and services revenue of US$ 59.6 billion. India continues to be the most preferred destination for companies looking to offshore their IT and back-office functions. It also retains its low-cost advantage and is among the most financially attractive locations when viewed in combination with the business environment it offers and the availability of skilled people, according to global management consultancy AT Kearney. India has retained its numerous Uno position even as some other well-established outsourcing hubs dropped in their attractiveness to be replaced by new emerging destinations in AT Kearney s latest ranking of the top outsourcing destinations across the globe. The top three countries in the 2009 Global Services Location Index (GSLI) remain the same India, China and Malaysia. 14

15 Domestic Markets India's domestic market has also become a force to reckon with, as the existing IT infrastructure evolves both in terms of technology and depth of penetration.according to NASSCOM, domestic IT market (including hardware) reached US$ 24.3 billion in FY as against US$ 23.1 billion in FY , a growth of 5.3 per cent. India Inc's demand for IT services and products has bolstered growth in the domestic sector with deal sizes going up remarkably and contracts worth US$ 50 million-us$ 100 million up for grabs. The market for enterprise networking equipment in India is estimated to grow from US$ 1 billion in 2008 to US$ 1.7 billion by 2012, recording a compounded annual growth rate (CAGR) of 15 per cent during this period, according to a study by Springboard Research. Investments Infosys Technologies Ltd will invest US$ 70 million over the next three quarters of the current financial year towards increasing its sales and marketing staff overseas, building new capabilities and hiring local resources for its international centres. The Andhra Pradesh Government expects the IT-related SEZs and Software Technology Parks of India (STPI) in the State to receive about US$ 3.27 billion investments in the next five years. HCL Technologies has entered into a strategic partnership with South Africa s UCS Group. As part of the all-cash deal, HCL will acquire UCS s enterprise solutions SAP practice focused on the retail sector for US$ 7.7 million. Rural Penetration According to a report of the Internet and Mobile Association of India (IAMAI), rural India has 3.3 million active internet users. Since rural India was mapped for the first time, the year-on-year growth of internet users in rural India could not be estimated. The research also notes there are 5.5 million people who claim to have used Internet at some point in time. 15

16 Government Initiatives The government set up the National Taskforce on Information Technology and Software Development with the objective of framing a long term National IT Policy for the country. Enactment of the Information Technology Act, which provides a legal framework to facilitate electronic commerce and electronic transactions. The government-led National e-governance Programme, has played an important role in increasing internet penetration in rural India. Road Ahead The Indian information technology sector continues to be one of the sunshine sectors of the Indian economy showing rapid growth and promise. According to a report prepared by McKinsey for NASSCOM, the exports component of the Indian industry is expected to reach US$ 175 billion in revenue by The domestic component will contribute US$ 50 billion in revenue by Together, the export and domestic markets are likely to bring in US$ 225 billion in revenue, as new opportunities emerge in areas such as public sector and healthcare, and as geographies including BRIC and Japan opt for greater outsourcing. 16

17 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. 17

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