25 April 2011 Asia Pacific/India Equity Research Computer Services & IT Consulting (IT Services) / OVERWEIGHT

Tata Consultancy Services

(TCS.BO / TCS IN)
Rating (from Outperform) NEUTRAL* Price (22 Apr 11, Rs) 1,191.65 Target price (Rs) (from 1,325.00) 1,275.00 Chg to TP (%) 7.0 Market cap. (Rs mn) 2,332,322 (US$ 52,553) Enterprise value (Rs mn) 2,266,899 Number of shares (mn) 1,957.22 Free float (%) 25.99 52-week price range 1238.00 - 699.10
*Stock ratings are relative to the relevant country benchmark. Target price is for 12 months.

DOWNGRADE RATING

All positives priced in

TCS reported in line March 2011 quarter results. Revenue grew 4.7% QoQ in dollar terms. Management indicated that excluding the Indian business, growth was 5.5% QoQ in dollar terms. The company reported flat margins despite a 200 bp fall in utilisation, benefiting from currency. PAT was 2.5% ahead of estimates due to higher other income. We believe demand environment is good but not extraordinary. Though leading Indian IT companies continue to point at the good demand environment, the March 2011 quarter was weaker than expectations at the beginning of the quarter. We thus believe the environment is good but not extraordinary. Taking a reality check on our estimates, we now build a 27%/26% YoY revenue growth in FY12/13 (USD-based, earlier 30%/28%). Strong performance with respect to peers is priced in. Over the past two years, TCS has delivered the best performance among the large Indian IT companies. This is also reflected in the share performance and the stock now trades at a P/E premium of 11% to Infosys and 20% to Wipro. Downgrade to NEUTRAL. Post results, due to reduction in our revenue estimates, our EPS numbers decline by 5%/8% for FY12/13 leading to the new target price of Rs1,275 (earlier: Rs1,325, DCF based). With a high overweight in investor portfolio and signs of strain on consensus upgrades, we believe the risk-reward is no more in our favour. With hardly a 7% upside to our target price, we downgrade the stock to NEUTRAL. We would be more positive on the stock closer to Rs1,025 and less so around our target price of Rs1,275.
3/11A 373,245.1 111,893.7 103,903.7 86,829.3 44.36 n.a. n.a. 26.3 26.9 1.2 9.2 37.6 net cash 3/12E 463,239.6 135,476.8 124,962.9 100,076.9 51.13 -4.6 52.3 15.3 23.3 1.9 8.1 37.2 net cash 3/13E 581,861.7 170,064.3 157,450.3 124,781.9 63.75 -7.8 61.8 24.7 18.7 1.9 6.5 38.6 net cash 3/14E 713,375.6 204,805.7 190,091.7 152,796.5 78.07 59.5 22.5 15.3 1.9 5.1 37.2 net cash

Research Analysts Bhuvnesh Singh 65 6212 3006 bhuvnesh.singh@credit-suisse.com Sunil Tirumalai 9122 6777 3714 sunil.tirumalai@credit-suisse.com Sagar Rastogi 91 22 6777 3851 sagar.rastogi@credit-suisse.com

Share price performance

Price (LHS) 1200 700 200 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Rebased Rel (RHS) 400 300 200 100 0

The price relative chart measures performance against the BOMBAY SE 30 SHARE SENSITIVE index which closed at 19602.23 on 21/04/11 On 21/04/11 the spot exchange rate was Rs44.38/US$1

Performance over Absolute (%) Relative (%)

1M 11.3 1.3

3M -1.7 -4.7

12M 51.9 35.4

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Financial and valuation metrics Year Revenue (Rs mn) EBITDA (Rs mn) EBIT (Rs mn) Net income (Rs mn) EPS (CS adj.) (Rs) Change from previous EPS (%) Consensus EPS (Rs) EPS growth (%) P/E (x) Dividend yield (%) P/B (x) ROE Net debt/equity (%)

Source: Company data, Thomson Financial Datastream, Credit Suisse estimates

25 April 2011

Focus charts and tables

Figure 1: TCS March 2011 quarter results
(Rs mn) Net sales EBIT EBIT margins (%) 4Q10 77,365 21,280 27.5 3Q11 96,634 27,132 28.1 23,302 4Q11 101,575 28,457 28.0 24,021 QoQ (%) 5.1 4.9 3.1 YoY (%) 31.3 33.7 24.4 CS Est 101,381 28,269 27.9 23,439 Difference (%) 0.2 0.7 2.5

Net Income 19,312 Source: Company data, Credit Suisse estimates

Figure 2: TCS versus Infosys operating metrics comparison (March 2011)

QoQ TCS Infosys YoY TCS Infosys

Volume growth % 2.9 (1.4) 30.7 17.2 Blended realisation change % (CC) 0.8 2.1 $-revenue growth (%) 4.7 1.1 33.1 23.6 Utilisation incl. trainees (bp increase) (200) (498) 80 (144) Headcount growth (%) 6.3 2.4 23.8 15.0 LTM attrition rate (bp increase) (50) 260 356 EBIT margin change (bp) (6) (122) 51 (132) Note: 1) Infosys volume and pricing are for only IT services, 2) blended realisation change incorporates impact of mix change of onsite/offshore. Source: Company data, Credit Suisse estimates

Figure 3: TCS 12-month fwd P/E based on consensus

30 25 20 15 10 5 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

Figure 4: TCS versus Infosys P/E based on consensus

30% 20% 10% 0% -10% -20% -30% -40% -50% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

Source: Bloomberg, Datastream, Company data

Source: Bloomberg, Datastream, Company data

Figure 5: Indian IT valuations

Ticker Tata Consultancy Infosys Technologies Wipro HCL Technologies Mindtree Infotech Enterprises Hexaware Mphasis Persistent Systems Average TCS.BO INFY.BO WIPR.BO HCLT.BO MINT.BO INFE.BO HEXT.BO MBFL.BO PERS.BO CMP Mkt cap Rs (US$ mn) Rating 1,192 2,909 463 519 391 154 69 453 392 52,565 37,830 25,618 8,016 353 386 454 2,145 353 N N O O U U U N O TP (Rs) 1,275 3,400 575 640 360 140 50 550 450 P/E FY3/12 FY3/13 23.3 21.2 17.0 14.8 9.7 11.8 13.8 10.5 11.2 18.6 18.7 16.9 13.6 11.2 9.2 10.0 11.9 8.8 8.8 14.8 EV/EBITDA FY3/12 FY3/13 16.7 14.9 12.9 0.2 4.9 6.1 9.2 7.0 5.5 12.2 13.0 11.7 10.3 0.2 3.9 4.9 7.9 6.0 4.2 9.7 EV/sales FY3/12 FY3/13 4.9 4.5 2.8 0.0 0.7 0.9 1.1 1.5 1.2 3.3 3.8 3.6 2.3 0.0 0.6 0.8 1.0 1.4 0.9 2.7

Note: Closing prices as of 21 April 2011: Source: Company data, Credit Suisse estimates, Datastream

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

In line results
TCS reported in line March 2011 results. Though its results were better than Infosys, on an absolute basis, we find volume performance weak. The company reported flat margins despite a 200 basis point fall in utilisation, benefitting from currency. PAT was 2.5% ahead of estimates due to higher other income.

In line topline, margins

TCS reported in line March 2011 numbers. Revenue grew 4.7% QoQ in dollar terms. Management indicated that excluding the Indian business, growth was 5.5% QoQ in dollar terms. EBIT margin stayed flat. EPS was 2.5% ahead due to higher other income.
Figure 6: TCS December 2010 quarter results
(Rs mn) Net sales Gross profit Gross margins (%) EBIT EBIT margins (%) EBITDA EBITDA margins (%) Other income Pre-tax income Income tax exp,/(gains) As a % of PBT Minorities' share of profits Net income 4Q10 77,365 36,244 46.8% 21,280 27.5% 23,121 29.9% 1,636 22,916 3,284 14.3% 320 19,312 3Q11 96,634 44,090 45.6% 27,132 28.1% 29,173 30.2% 1,817 28,949 5,385 18.6% 262 23,302 4Q11 101,575 44,612 43.9% 28,457 28.0% 30,739 30.3% 2,263 30,720 6,404 20.8% 295 24,021 QoQ (%) 5.1% 1.2% 4.9% 5.4% 24.6% 6.1% 18.9% 12.6% 3.1% YoY (%) 31.3% 23.1% 33.7% 32.9% 38.3% 34.1% 95.0% -7.7% 24.4% CS Est 101,381 45,698 45.1% 28,269 27.9% 30,460 30.0% 835 29,105 5,297 18.2% 368 23,439 Difference (%) 0.2% -2.4% 0.7% 0.9% 171.0% 5.5% 20.9% -19.8% 2.5%

Topline/EBIT/PAT were 0.2%, 0.7% and 2.5% ahead of estimates

Source: Company data, Credit Suisse estimates

Figure 7: TCS ex. CMC results summary

TCS excl. CMC Revenues Gross profit Gross margins (%) EBIT EBIT margins (%) EBITDA EBITDA margins (%) 4Q10 75,023 34,847 46.4% 20,787 27.7% 22,597 30.1% 3Q11 93,893 42,600 45.4% 26,641 28.4% 28,654 30.5% 4Q11 98,634 42,998 43.6% 27,966 28.4% 30,217 30.6% QoQ (%) 5.0% 0.9% 5.0% 5.5% YoY (%) 31.5% 23.4% 34.5% 33.7% CS Est 98,351 43,891 44.6% 27,631 28.1% 29,782 30.3% Difference (%) 0.3% -2.0% 1.2% 1.5%

Source: Company data, Credit Suisse estimates

Weak volume growth a bit of a worry

Volume growth was weak at 2.9% QoQ (3.3% QoQ excluding India). This is the weakest volume growth in the last eight quarters for the company.

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

Figure 8: TCS reported the weakest volume growth in eight quarters

Volume growth QoQ 12% 10% 8% 6% 4% 2% 0% Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11

Source: Company data, Credit Suisse estimates

Good performance versus Infosys

TCS volume growth of 2.9% QoQ was unexciting. However, Infosys performance at QoQ volume decline of 1.4% was even worse. Thus, despite an in-line performance, relative comparison makes TCS seems good.
Figure 9: TCS versus Infosys operating metrics comparison (March 2011)
QoQ TCS Volume growth % Blended realisation change % (CC) $-revenue growth (%) Utilisation incl. trainees (bp increase) Headcount growth (%) LTM attrition rate (bp increase) EBIT margin change (bp) Source: Company data, Credit Suisse estimates 2.9 0.8 4.7 (200) 6.3 (6) Infosys (1.4) 2.1 1.1 (498) 2.4 (50) (122) YoY TCS 30.7 33.1 80 23.8 260 51 Infosys 17.2 23.6 (144) 15.0 356 (132)

Figure 10: TCS and Infosys revenue growth performance

QoQ US$ revenue growth

Figure 11: TCS and Infosys margin performance

EBIT margins

14% 12% 10% 8% 6% 4% 2% 0% Ju n-09 Sep-09 Dec-09 TCS M ar-1 0 Infosys Ju n-10 Sep-10

32% 30% 28% 26% 24% 22% Jun-0 9 Sep-09 Dec-0 9 Mar-10 TCS Jun -10 Infosys Se p-10 Dec-10 Ma r-11

Source: Company data

Source: Company data

Margins sustained
TCS reported an EBIT margin drop of just 6 basis points during the quarter despite a drop in utilisation of 200 basis points. The factors behind margin movement during the quarter were: (1) currency (+58 bp); (2) pricing (1 bp); and (3) provisions for doubtful debts (28 bp) and other SG&A expenses (19 bp). Write back of bad loans resulted in a margin movement of negative 20 basis points QoQ. Currency helped offset impact of other factors

Tata Consultancy Services (TCS.BO / TCS IN)

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Figure 12: Impact of various costs on margins

Revenues (Rs mn) Costs as % of sales: Cost of services Employee costs Depreciation Travel Communication Rent other costs Cost of equipment and software licenses SG&A expenses Employee costs Depreciation Provision of doubtful debts and advances Rent Travel Communication Recruitment and training Professional fees Research and development Other costs Source: Company data Mar-09 71,718 Jun-09 72,070 Sep-09 74,351 Dec-09 76,503 Mar-10 77,365 Jun-10 82,173 Sep-10 92,864 Dec-10 96,634 Mar-11 101,575

52.1% 44.4% 1.5% 1.0% 1.1% 1.8% 2.4% 2.5% 21.7% 12.5% 1.0% 0.4% 1.5% 0.8% 0.6% 0.3% 0.9% 0.2% 3.5%

50.8% 43.7% 1.4% 0.9% 1.0% 1.9% 1.9% 3.6% 20.7% 12.6% 1.0% 0.7% 1.2% 0.6% 0.5% 0.2% 0.6% 0.2% 3.2%

51.7% 45.0% 1.5% 0.8% 1.0% 1.6% 1.7% 2.5% 19.5% 11.8% 1.0% 0.9% 0.8% 0.6% 0.4% 0.3% 0.5% 0.1% 3.2%

51.2% 44.1% 1.5% 0.9% 1.0% 1.9% 1.9% 2.4% 19.2% 11.7% 0.9% 0.2% 0.7% 0.8% 0.5% 0.4% 0.6% 0.1% 3.2%

50.8% 44.1% 1.5% 0.9% 0.9% 1.8% 1.7% 2.3% 19.3% 10.9% 0.9% 0.8% 0.7% 0.7% 0.4% 0.5% 0.4% 0.7% 3.3%

53.0% 45.4% 1.6% 1.0% 1.2% 1.6% 2.4% 2.3% 17.5% 11.4% 0.6% -0.1% 0.9% 0.7% 0.4% 0.6% 0.5% 0.3% 2.2%

51.5% 44.9% 1.5% 1.0% 1.0% 0.8% 2.4% 3.6% 16.8% 11.4% 0.6% -0.3% 0.7% 0.6% 0.4% 0.5% 0.5% 0.3% 2.2%

52.0% 44.4% 1.5% 0.9% 1.1% 1.3% 2.7% 3.1% 16.9% 11.2% 0.7% -0.3% 0.9% 0.8% 0.4% 0.6% 0.5% 0.3% 2.0%

51.7% 44.4% 1.6% 0.8% 1.0% 1.5% 2.4% 2.9% 17.4% 11.3% 0.7% -0.1% 0.9% 0.8% 0.4% 0.6% 0.6% 0.3% 1.8%

Customers continue to spend

Management stated that while it continued to monitor the macro-environment, customers continued to spend on IT to improve efficiency or growth. It was seeing strong traction in enterprise solutions (up 18% QoQ in dollar terms), which indicated a return of discretionary spend. All verticals except telecommunications grew in the quarter. Going forward, management expects the vertical to grow, albeit at a slower pace compared to the rest of the company. Transportation and hi-tech verticals posted double-digit growth in the quarter in dollar terms. Enterprise solutions spend up 18% QoQ in dollar terms

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

Figure 13: TCS quarterly operating metrics

Mar 09 Employee metrics Total (incl. Indian subsidiary) Total (excl. Indian subsidiary) Gross addition (excl. Indian subsidiary) Net addition (excl. Indian subsidiary) Attrition (%) Attrition no. of people Utilisation (%) Blended with trainees Blended without trainees Client metrics Revenue concentration Top client (%) Top 5 clients (%) Top 10 clients (%) Active clients New clients Repeat business (%) Project type break-up of revenues Fixed price (%) Time & Material (%) Revenue break-up by delivery location Onsite (%) Offshore (%) GDC (%) Key industry break up of revenues Financial Services (%) Manufacturing (%) Telecom (%) Retail and distribution (%) Key geographical break-up of revenues Americas (%) UK (%) Europe (%) India (%) Source: Company data 52.4% 17.9% 10.8% 8.2% 52.3% 16.9% 11.0% 9.1% 53.4% 16.5% 10.6% 7.3% 52.5% 16.0% 10.4% 8.5% 54.0% 15.2% 10.0% 8.9% 55.0% 15.1% 8.9% 8.8% 53.7% 15.3% 9.1% 9.9% 53.5% 16.0% 9.3% 9.2% 53.4% 15.5% 9.9% 8.8% 42.8% 9.8% 13.1% 12.0% 43.9% 9.2% 12.6% 12.2% 45.0% 8.7% 12.0% 12.0% 45.0% 8.3% 12.1% 12.0% 44.4% 8.3% 12.1% 12.3% 44.7% 7.4% 12.7% 11.0% 44.0% 7.4% 12.8% 10.9% 44.6% 7.2% 11.9% 10.9% 44.0% 7.5% 11.0% 11.2% 48.2% 4.1% 47.7% 44.4% 5.2% 50.4% 42.7% 6.2% 51.1% 42.5% 6.2% 51.3% 43.6% 5.4% 51.0% 43.6% 5.2% 51.2% 43.9% 5.0% 51.1% 43.7% 4.9% 51.4% 44.7% 5.0% 50.3% 47.1% 52.9% 47.4% 52.6% 47.2% 52.8% 48.0% 52.0% 48.7% 51.3% 49.1% 50.9% 49.0% 51.0% 49.7% 50.3% 49.5% 50.5% 4.7% 18.6% 26.9% 985 36 95.6% 5.7% 19.4% 28.0% 933 26 99.7% 6.8% 20.5% 28.9% 896 30 98.2% 8.1% 21.5% 29.9% 917 32 96.5% 8.2% 21.8% 30.2% 917 39 95.7% 8.1% 22.0% 30.5% 930 36 98.4% 8.0% 22.1% 30.1% 936 30 98.3% 7.7% 21.9% 30.1% 959 35 97.6% 7.4% 21.4% 29.6% 969 39 97.1% 69.4% 79.7% 71.3% 79.2% 73.6% 79.5% 77.2% 81.1% 74.3% 81.8% 74.8% 82.6% 77.7% 83.8% 77.1% 83.8% 75.1% 82.4% 143,761 126,150 3,522 521 11.4% 3,001 141,642 123,404 2,828 (2,119) 11.5% 4,947 141,962 123,092 5,530 320 11.4% 5,210 149,654 130,509 11,377 7,417 11.5% 3,960 160,429 140,619 14,640 10,110 11.8% 4,530 163,700 142,939 8,464 2,320 13.1% 6,144 174,417 153,168 17,121 10,229 14.1% 6,892 186,914 163,995 16,847 10,827 14.4% 6,020 198,614 175,373 19,324 11,700 14.4% 7,624 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Dec 08

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

Outlook remains positive

In line with positive commentary from Infosys management, TCS also maintained that the environment remains strong. The company has guided to total gross hires of 60,000 in FY3/12. In our view, there is substantial scope for upward revision to this number. Margins could largely sustain at current levels. Weak volume growth by both Infosys and TCS indicates that while the demand environment is good, it is not extraordinary. Taking a reality check on our estimates, we reduce our EPS estimates by 5%/8% for FY12/13.

Positive management commentary

In line with positive commentary from Infosys management, TCS also maintained that the environment remains strong. The deal pipeline is better than it was 12 months ago, pricing could improve and nearly all verticals (except telecommunications) are exhibiting good traction.

Conservative hiring guidance

The company has guided to making total gross hires of 60,000 personnel in FY3/12. In our view, there is substantial scope for an upward revision to this number given that utilisation (including trainees) is fairly high at 75%. Management indicated that it would aim for a fresher:lateral hiring ratio of 50:50 in FY13/12 versus the 45:55 ratio in FY3/11.

Margins could sustain at current level

The company plans to award wage hikes of 12-14% to its offshore employees and 2-4% to its onsite employees. Management hopes to offset the impact by price increases, operating leverage, utilisation increase (82-84% versus 77-78% historic) and improving efficiency.

Taking a reality check on estimates

Post results, we downgrade our revenue growth estimates to 27% and 26% over the next two years. This, coupled with a slight change in our margin estimates, leads to a reduction of 5%/8% in our EPS estimates.

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

Figure 14: TCS changes to consolidated estimates

Old estimates FY3/12E Rs/US$ Revenues ($ mn) YoY growth ($) Rs mn Revenues (Rs mn) YoY growth (Rs) Gross profit Gross margins EBIT (Rs mn) EBIT margins EBITDA EBITDA margins PBT PAT Net margins EPS (Rs/share) 476,119 27.6% 210,691 44.3% 132,171 27.8% 142,685 30.0% 135,540 104,911 22.0% 53.60 609,396 28.0% 271,306 44.5% 171,937 28.2% 184,551 30.3% 178,004 135,366 22.2% 69.16 463,240 24.1% 213,456 46.1% 124,963 27.0% 135,477 29.2% 129,431 100,077 21.6% 51.13 581,862 25.6% 268,512 46.1% 157,450 27.1% 170,064 29.2% 164,278 124,782 21.4% 63.75 -5.5% -5.1% -4.5% -4.6% -4.6% -8.4% -7.8% -7.7% -7.8% -7.8% -2.7% 1.3% -4.5% -1.0% 44.7 10,649 29.8% FY3/13E 44.7 13,630 28.0% New estimates FY3/12E 44.5 10,410 27.2% FY3/13E 44.5 13,076 25.6% % change FY3/12E -0.5% -2.2% FY3/13E -0.5% -4.1%

Source: Company data, Credit Suisse estimates

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

Rich valuations force downgrade

TCS is trading at 22.5x 12-month forward consensus EPS, at the higher end of its historical range. Over the past two years, TCS has delivered the best performance among the largest three Indian IT companies. However, the market has also rewarded TCS for its performance and the stock now trades at a P/E premium of 11% to Infosys and 20% to Wipro. Given its strong share price performance, and a high overweight in investor portfolio, we believe that the risk-reward is no more in our favour. With hardly a 7% upside to our target price, we downgrade shares to NEUTRAL. We would be buyers of the shares closer to Rs1,025 and sellers around our target price of Rs1,275

Trading at higher end of historical range

TCS is currently trading at 22.5x 12-month forward consensus P/E, at the higher end of its historical range of 19-25x.
Figure 15: TCS 12M fwd P/E based on consensus
30 25 20
15

Figure 16: TCS 12M fwd EV/EBITDA based on CS est

25 20

15 10 5 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

10 5 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

Source: Bloomberg, Datastream, Company data

Source: Bloomberg, Datastream, Company data

The stock also trades at a premium of 46% with respect to the market, which is at the higher end of its historical range.
Figure 17: TCS versus MSCI India 12-month forward P/E

80 % 60 % 40 % 20 % 0% -20 % -40 % Apr-05 A pr-0 6 Ap r-07 Apr-08 Apr-0 9 Apr-10 Apr-11

Source: Bloomberg, Datastream, Company data

Strong relative performance vs peers priced in

Over the past two years, TCS has delivered best performance among the largest three Indian IT companies. However, the market has also rewarded TCS for its performance and

Tata Consultancy Services (TCS.BO / TCS IN)

25 April 2011

the stock now trades at a P/E premium of 11% to Infosys and 20% to Wipro (FY12 estimates).
Figure 18: TCS versus Infosys 12M fwd P/E (consensus)
30% 20% 10% 0% -10% -20% -30% -40% -50% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

Figure 19: TCS versus Wipro 12M fwd P/E (consensus)

40% 30% 20% 10% 0% -10% -20% -30% Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

Source: Bloomberg, Datastream, Company data

Source: Bloomberg, Datastream, Company data

Downgrade to NEUTRAL
Given strong share price performance, and high overweight in the investor portfolio, we believe that the risk-reward is no more in our favour. With hardly 7% upside to our target price, we downgrade shares to NEUTRAL. We would be more positive on the stock closer to Rs1,025 and less so around our target price of Rs1,275.

Tata Consultancy Services (TCS.BO / TCS IN)

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25 April 2011

Financials
Figure 20: TCS summary financial estimates
Year-end 31 Mar (Rs mn) Income statement Net sales Gross profit Gross margins (%) EBIT EBIT margins (%) Depreciation EBITDA EBITDA margins (%) Total non-oper. income Pre-tax income Income tax exp/(gains) Net income Net income after extra-ordinaries and minorities EPS (Rs) Balance sheet Total current assets Cash and short-term investments Receivables and other current assets Net fixed assets Gross fixed assets Less : depreciation Capital work in progress Other assets Associates and long term investments Total assets Total current liabilities Total LT liabilities Total equity Minority interest Total liabilities Cash flow statement Net income Add : Depreciation Total gross cash flows Change in working capital Cash flow from operation Change in LT investments-share of profit Change in fixed asset Change in other asset Cash flow from investing Equity dividend Change in debt and liabilities Change in equity Cash flow from financing Change in cash Source: Company data, Credit Suisse estimates 278,129 123,738 44.5% 66,044 23.7% 5,766 71,810 25.8% (4,673) 61,372 9,013 52,359 51,746 26.44 121,941 14,839 107,102 37,490 64,023 26,533 50,989 17,271 227,691 61,433 6,580 156,545 3,133 227,691 300,289 138,660 46.2% 79,591 26.5% 7,208 86,799 28.9% 2,256 81,846 12,088 69,758 68,729 35.12 138,149 46,774 91,376 41,706 75,447 33,741 58,518 37,839 276,213 56,197 6,843 209,404 3,768 276,213 373,245 167,853 45.0% 103,904 27.8% 7,990 111,894 30.0% 5,247 109,151 21,203 87,948 86,829 44.36 171,948 47,401 124,547 52,340 94,072 41,731 89,929 18,390 332,608 64,837 10,718 252,389 4,663 332,608 463,240 213,456 46.1% 124,963 27.0% 10,514 135,477 29.2% 4,468 129,431 27,984 101,447 100,077 51.13 230,512 73,448 157,064 60,479 112,633 52,154 74,969 20,522 386,481 87,769 8,025 286,319 4,368 386,481 581,862 268,512 46.1% 157,450 27.1% 12,614 170,064 29.2% 6,827 164,278 37,920 126,357 124,782 63.75 318,130 122,152 195,978 67,865 132,633 64,768 74,969 20,522 481,485 109,515 8,025 359,577 4,368 481,485 713,376 328,639 46.1% 190,092 26.6% 14,714 204,806 28.7% 10,983 201,075 46,467 154,608 152,797 78.07 438,063 199,233 238,830 73,151 152,633 79,482 74,969 20,522 606,704 133,461 8,025 460,849 4,368 606,704 FY09A FY10A FY11A FY12E FY13E FY14E

51,746 5,766 57,512 (2,847) 54,666 (17,081) (13,042) (27,216) (57,339) (16,036) (131) (2,985) (19,152) (21,826)

68,729 7,208 75,937 10,491 86,427 (20,568) (11,424) (7,529) (39,522) (45,779) 898 29,910 (14,971) 31,935

86,829 7,990 94,819 (24,531) 70,288 19,449 (18,624) (31,411) (30,586) (32,013) 4,770 (11,831) (39,074) 628

100,077 10,514 110,591 (9,584) 101,006 (2,132) (18,653) 14,961 (5,824) (51,524) (2,988) (14,624) (69,135) 26,047

124,782 12,614 137,396 (17,168) 120,228 (20,000) (20,000) (51,524) 0 (51,524) 48,704

152,797 14,714 167,510 (18,906) 148,605 (20,000) (20,000) (51,524) (0) (51,524) 77,081

Tata Consultancy Services (TCS.BO / TCS IN)

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Figure 21: TCS key ratios

Year-end 31 Mar Margins (%) Gross margins EBITDA margins EBIT margins Net profit margins YoY growth (%) Revenue growth Gross profit growth EBIT growth EBITDA growth Net profit growth Return ratios (%) ROE ROIC Turns ratios (x) Working capital turns Fixed asset turns 4.60 x 7.42 x 4.61 x 7.20 x 3.85 x 7.13 x 4.01 x 7.66 x 4.02 x 8.57 x 4.04 x 9.75 x 36.2 39.2 36.9 37.5 36.9 37.1 36.5 37.7 38.1 42.6 36.9 45.6 22.1 21.9 25.2 22.8 3.1 8.0 12.1 20.5 20.9 32.8 24.3 21.1 30.5 28.9 26.3 24.1 27.2 20.3 21.1 15.3 25.6 25.8 26.0 25.5 24.7 22.6 22.4 20.7 20.4 22.5 44.5 25.8 23.7 18.6 46.2 28.9 26.5 22.9 45.0 30.0 27.8 23.3 46.1 29.2 27.0 21.6 46.1 29.2 27.1 21.4 46.1 28.7 26.6 21.4 FY09A FY10A FY11A FY12E FY13E FY14E

Source: Company data, Credit Suisse estimates

Figure 22: TCS operating metrics

Year-end 31 Mar Billing rates YoY growth (%) Onsite Offshore Blended Billed man-months YoY growth (%) Onsite Offshore Total Revenue Onsite YoY growth (%) Offshore YoY growth (%) Onsite (% of revenue) Utilisation rates (%) Including trainees Excluding trainees Source: Company data, Credit Suisse estimates -3.2 -5.5 -6.9 6.4 18.7 15.1 6.4 18.7 53.9 72.6 79.8 2.0 0.0 -7.3 -14.4 22.9 12.8 -14.4 22.9 51.6 74.1 80.4 -0.3 -3.3 -2.0 30.5 30.6 30.6 30.5 30.6 43.3 76.2 83.2 1.6 1.3 1.5 26.2 26.2 26.2 26.2 26.2 44.0 77.7 82.1 0.6 0.6 0.6 25.5 25.5 25.5 25.5 25.5 44.1 79.0 82.9 0.1 0.1 0.1 5.4 5.4 5.4 5.4 5.4 44.1 79.4 83.1 FY09A FY10A FY11A FY12E FY13E FY14E

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Companies Mentioned (Price as of 22 Apr 11) HCL Technologies (HCLT.BO, Rs518.65, OUTPERFORM, TP Rs640.00) Hexaware Technologies (HEXT.BO, Rs69.35, UNDERPERFORM [V], TP Rs50.00) Infosys Technologies Ltd. (INFY.BO, Rs2909.25, NEUTRAL, TP Rs3400.00) Infotech Enterprises Ltd (INFE.BO, Rs153.80, UNDERPERFORM [V], TP Rs140.00, MARKET WEIGHT) Mindtree Ltd (MINT.BO, Rs391.00, UNDERPERFORM [V], TP Rs525.00) Mphasis Ltd (MBFL.BO, Rs453.25, NEUTRAL, TP Rs550.00, MARKET WEIGHT) Persistent Systems (PERS.BO, Rs395.75, OUTPERFORM, TP Rs450.00) Tata Consultancy Services (TCS.BO, Rs1191.65, NEUTRAL, TP Rs1275.00) Wipro Ltd. (WIPR.BO, Rs463.20, OUTPERFORM, TP Rs575.00)

Disclosure Appendix
Important Global Disclosures I, Bhuvnesh Singh, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for INFY.BO
INFY.BO Date 23-Jun-08 14-Jul-08 24-Sep-08 13-Oct-08 24-Nov-08 18-May-09 13-Jul-09 2-Sep-09 11-Dec-09 14-Apr-10 18-Oct-10 11-Jan-11 18-Apr-11 Closing Price (Rs) 1,847.5 1,556.1 1,523.7 1,319.65 1,196.2 1,769.85 1,767.95 2,165.2 2,454.75 2,782.35 3107 3,329.25 2,905.2 Target Price Initiation/ (Rs) Rating Assumption 2150 2050 1800 N 1400 1650 O 1825 1950 2550 2900 3150 3575 4050 3400 N
4050 3601 3101 2900 2601 2101 2150 2050 1800 1601 Rs 1101
r -0 8 -A p -J u n0

3575 3150

3400 N

2550 1950

1825

1650 N 1400 O

3-Year Price, Target Price and Rating Change History Chart for TCS.BO
TCS.BO Date 23-Jun-08 25-Jun-08 7-Jul-08 17-Jul-08 24-Sep-08 23-Oct-08 24-Nov-08 21-Apr-09 18-May-09 20-Jul-09 2-Sep-09 19-Oct-09 12-Jan-10 18-Jan-10 20-Apr-10 22-Oct-10 11-Jan-11 Closing Price (Rs) 429.525 438.875 425 391 361.375 266 258.675 272.95 371.925 500.6 536.6 607.5 748 800.6 789 1038 1108 Target Price Initiation/ (Rs) Rating Assumption 550 O 537.5 487.5 375 U 312.5 362.5 O 325 362.5 500 625 650 810 900 940 1175 1325
1325 1222 1022 822 622 550 538 488 422 Rs 222
r -0 8 -A p -J u n0

Tata Consultancy Services (TCS.BO / TCS IN)

8 -A ug -0 8 24 -O c t08 24 -D ec 24 08 -F eb 24 0 9 -A pr 24 0 9 -J un -0 24 9 -A ug -0 9 24 -O c t09 24 -D ec -0 9 24 -F eb -1 24 0 -A pr -1 0 24 -Ju n10 24 -A ug 24 10 -O c t10 24 -D ec -1 0 24 -F eb -1 1

24

24

24

8 -A ug -0 8 24 -O c t08 24 -D ec 24 08 -F eb 24 0 9 -A pr 24 0 9 -J un -0 24 9 -A ug -0 9 24 -O c t09 24 -D ec -0 9 24 -F eb -1 24 0 -A pr -1 0 24 -Ju n10 24 -A ug 24 10 -O c t10 24 -D ec -1 0 24 -F eb -1 1

24

24

24

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

1175

900 810 625 650 O 500 375 363 U 313 363 325 O

940

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

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3-Year Price, Target Price and Rating Change History Chart for WIPR.BO
WIPR.BO Date 23-Jun-08 7-Jul-08 21-Jul-08 24-Sep-08 23-Oct-08 24-Nov-08 18-May-09 23-Jul-09 2-Sep-09 28-Oct-09 12-Jan-10 21-Jan-10 25-Oct-10 24-Jan-11 21-Feb-11 Closing Price (Rs) 287.73 264 223.59 222.45 163.35 140.19 254.79 273.75 332.73 374.07 416.73 425.49 430.3 444.35 450.25 Target Price Initiation/ (Rs) Rating Assumption 318 300 240 U 216 198 204 O 240 N 270 360 O 408 474 489 475 N 515 575 O
570 520 470 420 370 320 270 220 170 Rs 120
r -0 8 -A p -J u n0

575 489 474 408 360 318 300 240 U 216 204 198 O
8 -A ug -0 8 24 -O c t08 24 -D ec 24 08 -F eb 24 0 9 -A pr 24 0 9 -J un -0 24 9 -A ug -0 9 24 -O c t09 24 -D ec -0 9 24 -F eb -1 24 0 -A pr -1 0 24 -Ju n10 24 -A ug 24 10 -O c t10 24 -D ec -1 0 24 -F eb -1 1

515 475 N O

O 240 270 N

24

24

24

Closing Price

Target Price

Initiation/Assumption

Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stocks total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stocks total return is expected to be in line with the relevant benchmark* (range of 10-15%) over the next 12 months. Underperform (U): The stocks total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stocks total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analysts coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analysts coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisses distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 47% (62% banking clients) Neutral/Hold* 41% (58% banking clients) Underperform/Sell* 11% (51% banking clients) Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisses policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Tata Consultancy Services (TCS.BO / TCS IN)

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Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (INFY.BO) Method: Our target price of Rs3,400 for Infosys is based on discounted cash flow (DCF) method. We assume a 22% near-term growth rate, 21% medium-term growth and 5% terminal growth. We use a weighted average cost of capital (WACC) of 14.5% to arrive at our target price. Risks: Risks to our Rs3,400 target price for Infosys Technologies include: 1) a weaker economic environment in the US leading to slower IT services spending; 2) stronger competition by global vendors in the offshore arena; 3) large clients of the company shifting a greater proportion of their work to their in-house centres; 4) greater-than-expected wage inflation; and 5) adverse currency movements. Price Target: (12 months) for (TCS.BO) Method: Our target price of Rs1,275 for TCS is based on discounted cash flow (DCF) method. We assume a 24% near-term growth rate, 19% medium-term growth and 3% terminal growth. We use a weighted average cost of capital (WACC) of 14.5% to arrive at our target price. Risks: Potential risks to our target price of Rs1275 for Tata Consultancy include 1) a slowdown in the US economy, which could lead to a slowdown in revenues, 2) Better margins that we expect, 3) Sharp appreciation or depreciation in the Rs vs. the $ Price Target: (12 months) for (WIPR.BO) Method: Our target price of Rs575 for Wipro is based on discounted cash flow (DCF) method. We assume a 21% near-term growth rate, 19% medium-term growth and 3% terminal growth. We use a weighted average cost of capital (WACC) of 14.5% to arrive at our target price. Risks: Risks to our Rs575 target price for Wipro include: 1) a weaker economic environment in the US leading to slower IT services; 2) greater-than expected wage inflation; 3) adverse currency movements on the downside and revenue and margin outperformance vs. peers on the upside Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (INFY.BO, TCS.BO, WIPR.BO) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (INFY.BO, TCS.BO, WIPR.BO) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (INFY.BO, TCS.BO, WIPR.BO) within the next 3 months. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (INFY.BO). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. An analyst involved in the preparation of this report has visited certain material operations of the subject company (INFY.BO) within the past 12 months. The analyst may not have visited all material operations of the subject company. The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (TCS.BO, WIPR.BO) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

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Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Bhuvnesh Singh, non-U.S. analyst, is a research analyst employed by Credit Suisse AG, Singapore Branch. Sunil Tirumalai, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. Sagar Rastogi, non-U.S. analyst, is a research analyst employed by Credit Suisse Securities (India) Private Limited. Taiwanese Disclosures: Reports written by Taiwan-based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

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