INDIA Institutional Research

IT Sector

Tata Consultancy Services Ltd Initiating Coverage

Rating Target Price CMP Upside (%) Nifty Sensex Key Data Bloomberg Code Reuters Code NSE Code BSE Code Current Share o/s (mn) Mkt Cap (Rs bn) 52 WK H/L (Rs) Face Value (Rs) Shareholding Pattern Nuetral 2,100 2,089 0.5% 5,906 19,895

IT Bellwether...
Investment Rationale
TCS is the largest firm in India providing IT services and solutions to a diverse set of global and regional clients through its 105 global delivery centers in 44 countries with a headcount of ~276,000 employees. It derives majority of the revenues (~56%) from US region followed by Europe (~27%) and Rest of the World (~17%). The company derives ~75% of its revenue from BFSI(43%), retail (14%), telecom (9.6%), manufacturing (8.4%) verticals with the balance from energy & utilities, transportation, healthcare and others. Client addition would stay robust: We believe IT spends are likely to be cut, yet India would continue to remain as preferred offshore destination for IT services on the back of capability and cost effectiveness. Global IT vendors are likely to expand India operations further and the effect of these trends is likely to have buoyant effect for companies like TCS Proportions of fixed price contracts are steadily increasing : TCS has the largest proportion of revenues accruing from fixed price projects among its offshore peers. The proportion of fixed price contracts averaged at around 48% between FY07 and FY09, the ratio hovered at around 48.5% between FY10 and FY13 India's off-shoring potential : We maintain our belief that India will continue to dominate the IT off-shoring market long time into the future. This is mainly because of the fact that global clients are now trying to justify every dollar they spend towards technology outsourcing. Hence, there is a growing pressure on technology budgets that will force companies in the US and Europe to outsource to the low cost but high value destinations like India. Outlook : We initiate coverage on TCS with a Neutral rating and a 12 months target price of Rs 2100. The key reason for our neutral rating is upside is priced in and we believe USD/INR prices have bottomed out. However, we are optimistic on TCSs market opportunity and competitive positioning. At CMP TCS currently trades at 21.9x at its FY15E EPS of Rs.95.5, which reflects a significant premium vis-a-vis other large cap IT companies. We believe the company to maintain its current operating margins and expect to plough back currency gains into the business. We further believe the large size of the addressable global market, with relatively low current level of penetration suggests significant headroom for future growth.

TCS IN TCS.BO TCS 532540 1957.2 4,018 2078/1055 1.0

(%)
74 15.7 5.9 4.4
(%)

Promoters FII DII Others Price Performance Period TCS Nifty

TCS 170 160 150

1M 6M

1yr

-5.4 35.7 49.3 4.1 -3.7 1.1

Nifty

140
130 120 110 100

90
80
1-Oct-12 15-Oct-12 29-Oct-12 12-Nov-12 26-Nov-12 10-Dec-12 24-Dec-12 7-Jan-13 21-Jan-13 4-Feb-13 18-Feb-13 4-Mar-13 18-Mar-13 1-Apr-13 15-Apr-13 29-Apr-13 13-May-13 27-May-13 10-Jun-13 24-Jun-13 8-Jul-13 22-Jul-13 5-Aug-13 19-Aug-13 2-Sep-13 16-Sep-13 30-Sep-13

Date: 8th October 2013 Analyst: Vikas Jain Vikas.jain@networthdirect.com Ph. No. 022-30641653
2014E 81,643 29.6% 23,093 36.2% 17,291 24.2% 30.2% 21.2% 34.7% 2015E 89,705 9.9% 25,049 8.5% 18,691 8.1% 30.3% 20.8% 30.1%

Particulars (INR Cr) Income from Operations growth EBIT growth PAT growth Key Ratios EBITDA Margin PAT Margin ROE %

2012A 48,894 31.0% 13,517 29.4% 10,413 14.8% 29.5% 21.3% 35.2%

2013A 62,989 28.8% 16,960 25.5% 13,917 33.6% 28.6% 22.1% 36.0%

Source: Company, Networth Research

Investment Rationale
Client addition would stay robust We believe IT spends are likely to be cut, yet India would continue to remain as preferred offshore destination for IT services on the back of capability and cost effectiveness. Global IT vendors are likely to expand India operations further and the effect of these trends is likely to have buoyant effect for companies like TCS, as the offshore outsourcing is becoming more modular, as single large deal are broken into multiple pieces. To tap the same, TCS has been continuously expanding its services and capabilities to become the preferred vendor for any large offshore outsourcing deals. From the below table it has shown that the trend in growth of revenue per client has declined from 24.3% in FY11 to 19.9% in FY13. However, the numbers of active clients have been increasing from last three years.

Active Clients

New Clients

1,200
1,150 1,100

170
160 150 140

1,050
130 1,000 950

120
110

900
FY09 FY10 FY11 FY12 FY13

100

Revenue per client (INR Cr)

60
50 40

Revenue per client

growth

30.0%
25.0% 20.0%

30
20 10

15.0%
10.0% 5.0%

FY08 FY09 FY10 FY11 FY12 FY13

0.0%

Source: Company, Networth Research

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

Proportions of fixed price contracts are steadily increasing TCS has the largest proportion of revenues accruing from fixed price projects among its offshore peers. The proportion of fixed price contracts averaged at around 48% between FY07 and FY09, the ratio hovered at around 48.5% between FY10 and FY13. Though managing a large fixed price projects has its own limitations, since margins can get hurt if a particular project encounters time and cost over runs, but TCS has long experience in managing fixed priced projects and we believe more and more offshore projects are likely to move towards fixed price from the time and material ones.

Time & Material 100 90 80 70 60 50 40 30 20 10 0

Fixed Price & Time

46.8

46.4

46.8

46.8

49.1

49.7

49.5

49.7

47.3

51.3 48.7 Q4 FY13

47

53.2

53.6

53.2

53.2

50.9

50.3

50.5

50.3

52.7

53

Q1 FY11

Q4 FY11

Q3 FY12

Q2 FY11

Q3 FY11

Q1 FY12

Q2 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Source: Company, Networth Research

India's off-shoring potential We maintain our belief that India will continue to dominate the IT off-shoring market long time into the future. This is mainly because of the fact that global clients are now trying to justify every dollar they spend towards technology outsourcing. Hence, there is a growing pressure on technology budgets that will force companies in the US and Europe to outsource to the low cost but high value destinations like India. Moreover, clients are now getting into the phase of 2nd generation outsourcing. This means that they are looking at more than one vendor to manage their outsourcing work. This has considerably increased the addressable market. We believe that companies like TCS, with their wide service offerings and execution capabilities, will emerge as winners on the back of economic benefits that they provide. There are concerns with regard to re-shoring of IT services related work particularly in the US, given the current political climate. However, the cost advantages are still significant. For example, an 'entry level' engineer in India still costs less than 15% of his counterpart in the US, which clearly allows India to retain its position as a top outsourcing destination. Further, despite the rapid growth over the past two decades, India's market share in global IT services stands at just 7%, leaving ample room for growth.

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

Q1 FY14

47.8

51

52.2

49

Newer services lines can be offshored TCS has the most complete set of services offerings within its peers. If we look at the services mix closely, then the newer services contribute about 40% of its revenues, significant portion of it can be moved offshore. We are already seeing the trend as some of the earlier onsite work is moved to offshore and the same has been growing at sequential quarter basis over the last many quarters. TCS has been able to hold on to its pole position of the largest player in its focus verticals even as competitors have gained market share. TCS has the largest presence in key verticals like BFSI, manufacturing as well as in emerging verticals like life sciences. It is the second largest vendor in other verticals like telecom, retail and transportation. Thus it has spread its revenues across verticals, which can be captured from the subsequent table. Q1 FY11 47.9 15.2 6.4 Q2 FY11 46.8 15.9 6.6 Q3 FY11 45 14.9 7.1 Q4 FY11 46.1 15.7 7 Q1 FY12 46.2 15.7 7.3 Q2 FY12 44.7 15.8 7.6 Q3 FY12 44 15.9 7.6 Q4 FY12 44.4 15.2 7.3 Q1 FY13 43.4 15.2 7.6 Q2 FY13 43.1 14.9 7.7 Q3 FY13 42.4 15.1 7.7 Q4 FY13 42.4 15.5 7.8 Q1 FY14 42.3 15.1 8.1

Segment IT Solutions and Services ADM (Appl. Dev. Magt) Enterprise Solutions Assurance Services Others Service lines Engineering & Industrial Services Infrastructure Services Global Consulting Asset Leveraged Solutions Business Process Services

4.8 8.7 2.1 3.7 11.2

4.9 9.4 2.1 3.4 10.9

4.8 10.5 2.3 4 11.4

4.8 9.1 2.1 3.6 11.6

4.6 9.5 2.2 3.6 10.9

4.8 9.6 2.6 4 10.9

4.5 10.6 2.8 3.8 10.8

4.6 10.4 2.7 3.9 11.5

4.6 10.6 2.8 2.8 13

4.6 11.4 3 2.7 12.6

4.7 11.7 3.2 2.8 12.4

4.6 12.1 3.1 2.5 12

4.7 11.9 3.5 2.5 11.9

At the end of June 2013, TCS boasted of one of the strongest deal pipelines in the IT sector. The order backlog included 53 clients in the greater than US$ 50 m category and 19 clients in the greater than US$ 100 m category. Further, TCS grew the clients in those buckets by 60.6% and 90% respectively between June 2011 and June 2013. A comparative study of the deal pipelines among TCS, Infosys and Wipro between June 2011 and June 2013 reveals that TCS enjoyed the highest growth across all client brackets (Wipro's growth in the greater than US$ 100 m category is an exception). The Latest management comments indicate that TCS is expecting discretionary projects and overall client spends to revive in the US. Besides, the European clients are also interested in awarding large deals based on traditional service offerings

US$ 1mn+ clients US$ 5mn+ clients US$ 10mn+ clients US$ 20mn+ clients US$ 50mn+ clients US$ 100mn+ clients

TCS 38.9% 41.1% 45.9% 36.3% 60.6% 90.0%

Infosys Wipro 24.6% 12.3% 17.5% 11.8% 11.2% 12.7% 2.5% 10.1% 28.1% 12.5% 36.4% 150.0%

Source: Company, Networth Research

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

TCS vs Infosys
Infosys is one the nearest competitor of TCS. Both these companies accounts for more than 15% of the total revenue of Indian IT companies. A brief overview of both the companys is reflected below: Revenue Growth

TCS 20.0% 15.0%

Infosys

10.0%
5.0% 0.0%

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q2 FY11

Q3 FY12

Q4 FY12

-5.0% -10.0%

Source: Company, Networth Research

Headcounts & Attriction Rate

Headcount (LHS) & Attrition (RHS)

300,000
250,000 200,000 150,000 100,000 50,000 15% 13% 11% 9%

7%
5%

Q1 FY11

Q1 FY12

Q1 FY13

Q2 FY11

Q3 FY11

Q4 FY11

Q2 FY12

Q3 FY12

Q4 FY12

Q2 FY13

Q3 FY13

Q4 FY13

TCS

Infosys

TCS

Infosys

Source: Company, Networth Research

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

Q1 FY14

Q1 FY14
5

Client Metrics (nos)

TCS 35 30 25 20 Infosys HCL Tech Wipro

15
10 5 0

Top 5 Clients

Top 5 Clients

Top 10 Clients

Top 10 Clients

Top 5 Clients
FY13

Top 5 Clients

FY10

FY11

FY12

Source: Company, Networth Research

Outlook & Valuation

We initiate coverage on TCS with a Neutral rating and set a 12 month target price of Rs.2100 (valuing the company at 22x at its FY15E EPS). The key reason for our neutral rating is upside is priced-in and we believe USD/INR prices are bottoming. However, we are optimistic on TCSs market opportunity and competitive positioning, we believe the TCS offer limited upside in near term given current valuation. At CMP TCS currently trades at price to earning multiple of 21.9x at its FY15E EPS of Rs.95.5, which reflects a significant premium vs other large cap IT companies. TCS has indicated that client spending trends will continue to remain positive on the back of pick up in discretionary spending across US and Europe with European clients continuing to focus on cost optimizing measures. We believe the company to maintain its current operating margins and expect to reinvest most of the currency gain back in the business. Further the large size of the addressable global market, with relatively low current level of penetration implies significant headroom for future growth.TCS has positioned itself well for the growth in business with an aligned strategy, structure and capabilities. On the macro level the economic slowdown in the US and Europe has eased, but uncertainty remains. The US economy has started improving; but growth is still tad low. Further, the ongoing issues of debt ceiling still remains headwinds Also Business models like cloud computing and other pay-for-use models are beginning to gain traction in most industries.

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

Top 10 Clients

Top 10 Clients

Top Client

Top Client

Top Client

Top Client

Trend in Revenue growth Revenue INR Cr

100,000 90,000

Revenue

Revenue growth
35.0% 30.0%

Revenue growth in FY15E may fall down to 11% as we expect pricing pressure may continue and expects rupee to appreciate

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 FY11 FY12 FY13 FY14E FY15E 5.0% 0.0% 15.0% 10.0%

25.0%
20.0%

Source: Company, Networth Research

Trend in EBIT Margin EBIT INR Cr

30,000 25,000 20,000

EBIT

EBIT Margin 28.5%

Improvement in EBIT margins in FY14E is expected primarily due to rupee depreciation.

28.0%

27.5% 15,000 27.0%

10,000
5,000 FY11 FY12 FY13 FY14E FY15E 26.5%

26.0%

Source: Company, Networth Research

Cash Flow from Operations (INR cr)

20,000 18,000 16,000

Cash Flow from Operations

growth 70.0% 60.0% 50.0% 40.0% 30.0% 20.0%

14,000
12,000 10,000 8,000 6,000 4,000 2,000 FY11 FY12 FY13 FY14E FY15E

10.0% 0.0% -10.0%

-20.0%

Source: Company, Networth Research Initiating Coverage Networth Research is also available on Bloomberg and Thomson 7

Operational Metrics
Geography America North America Latin America Europe UK Continental Europe India Asia Pacific MEA Vertical BFSI Telecom Retail & Distribution Maufacturing Hi-Tech Life Science & Healthcare Travel & Hospitality Energy & Utilities Media & Entertainment Others Clients Contributions US$ 1mn+ clients US$ 5mn+ clients US$ 10mn+ clients US$ 20mn+ clients US$ 50mn+ clients US$ 100mn+ clients Utilization Rate Including Trainees Source: Company, Networth Research Excluding Trainees 15.5 10.1 8.3 7.5 2.2 Q2 FY12 43.5 10.7 12.1 7.8 5.9 5.3 3.8 4.3 2.1 4.5 Q2 FY12 495 230 155 94 36 12 Q2 FY12 76.4 83.1 15 10.5 8.4 7.6 2.1 Q3 FY12 43.3 10 12.3 7.8 5.9 5.3 3.8 4.1 2.2 5.3 Q3 FY12 512 235 161 95 39 14 Q3 FY12 74 82 15.2 9.8 8.5 7.7 2.1 Q4 FY12 42.2 10 12.5 7.9 6 5.3 3.7 3.8 2.2 6.4 Q4 FY12 522 245 170 99 43 14 Q4 FY12 71.3 80.6 17 9.6 7.1 7.4 2.1 Q1 FY13 43 10.3 13.2 7.9 6 5.3 3.7 3.6 2.2 4.8 Q1 FY13 527 259 175 105 46 14 Q1 FY13 72.3 81.3 17.1 9.5 7.5 7.6 2.1 Q2 FY13 42.8 10.3 13.4 8.2 5.9 5.2 3.6 3.6 2.2 4.8 Q2 FY13 538 269 182 108 45 14 Q2 FY13 72.8 81.6 17.5 9.4 7.6 7.5 2.1 Q3 FY13 43 9.5 13.4 8.5 5.8 5.2 3.6 3.8 2.1 5.1 Q3 FY13 551 273 185 114 47 16 Q3 FY13 72.1 81.7 16.8 9.4 8.8 7.3 2.1 Q4 FY13 43.5 9.3 13.4 8.5 5.7 5.1 3.4 3.8 2.1 5.2 Q4 FY13 638 290 211 121 52 17 Q4 FY13 72.2 82 17 9.9 7.6 6.9 2.1 Q1 FY14 43 9.6 14 8.4 5.5 5.5 3.4 3.7 2.1 4.8 Q1 FY14 657 309 216 124 53 19 Q1 FY14 72.5 82.7 53.4 3 53.3 3.1 53.6 3.1 53.5 3.3 52.8 3.4 52.6 3.3 52.1 3.5 54.1 2.4 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13 Q2 FY13 Q3 FY13 Q4 FY13 Q1 FY14

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

Industry Outlook
Re-shoring of IT services: Clients are now getting into the phase of 2nd generation outsourcing. This means that they are looking at more than one vendor to manage their outsourcing work. This has considerably increased the addressable market. We believe that companies like TCS, with their wide service offerings and execution capabilities, will emerge as winners on the back of economic benefits that they provide. There are concerns with regard to reshoring of IT services related work particularly in the US, given the current political climate. However, the cost advantages are still significant. For example, an 'entry level' engineer in India still costs less than 15% of his counterpart in the US, which clearly allows India to retain its position as a top outsourcing destination. Further, despite the rapid growth over the past two decades, India's market share in global IT services stands at just 7%, leaving ample room for growth.

Labour arbitrage: Labour arbitrage has been the competitive edge of the Indian software sector over the last few years. However, this seems to be threatened now by MNCs who are replicating the Indian outsourcing model and setting up bases in the country. Going forward, the advantage of low employee costs could peter out and the sector could get commoditized.

Forex Volatility: In our view exchange rates remain a significant factor in analyzing growth in
any single currency. Movement in the dollar relative to other currencies complicates the interpretation of forecasts and can distort spending comparisons between regions that use different currencies

Liquidity not a challenge: The liquidity position of IT services in 2013 will be comfortable,
backed by their huge cash flow, low debt levels and positive free cash flow from recurring and critical nature of IT services. However demand contraction due to double dip recession or any increase in M&A activity, large dividend, shares buyback and expansion in receivable days will be the key risks to liquidity.

Outlook:
With some pick-up in US and stability in Europe, demand is likely to improve going ahead. The decision-making cycle seems to be improving also revenue growth should see some pick -up in coming quarters. The worldwide spending on technology and related services in 2012 was USD 1.9 trillion2, a growth of 4.8% over 2011. Spend on IT, BPO and software products, continued to have the majority share of 58% of total IT spend, standing at USD 1 trillion. While banking, financial services & insurance (BFSI) and manufacturing remained the largest verticals in terms of total share in IT spending, emerging verticals such as healthcare, retail, government and utilities were the drivers of incremental growth in 2012. The worldwide IT outsourcing (ITO) market is forecast to reach $288 billion in 2013, a 2.8 percent increase in U.S. dollars (and 5.1 percent in constant currency*) from 2012, according to Gartner, Inc. Compared with Gartner's previous forecast, nearly all ITO segments are now forecast to grow more slowly during 2013. During Q2 FY14, we expect 2-5 percent qoq constant currency for large cap IT companies, we believe currency volatility will boost the margins across the board and also it would help the companies to mitigate the hike in wages which will increase the EBIT margins or remain stable. While US Immigration bill continues to be an overhang, we believe this is the event risk for the sector but the noise has definitely subsided.

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

Concerns
Forex Volatility The Indian rupee has been very volatile against USD over the past few months (See graph). The exchange rate movement is beyond the control of the companies. Volatility in forex increases the volatility in revenues of the Indian IT services, as 80 percent of the billing of the IT companies are in foreign currency. Also the volatility in currency also does not give any scope for the IT companies to make any kind of planned move. With around 90% of TCSs billing in foreign currency, Rupees volatility is a huge risk for the company.

USD vs INR 68

66
64 62

60
58 56

54
52 50

Dec-12

Oct-12

Jun-13

Nov-12

Feb-13

Apr-13

Mar-13

Source: Bloomberg

Highly dependent on BFSI vertical Among the top five Indian IT companies, TCS has highest exposure in BFSI vertical. Around 43% of the total revenue of TCS is generated from this vertical; this high exposure in BFSI increases the risk of taking a hit if the vertical underperform as there is lot of ongoing troubles in the vertical post 2008 crisis. However, TCS has maintained the contribution of BFSI despite of global financial crisis was at a high. Further, during Q1 FY14 out of 10 large deals, two of them were in the BFSI vertical. Management has also indicated that banking clients are focusing on cost reduction and we believe TCS has all the capability to provide them with their experience. Global Slowdown There is an uncertainty in the whole global economic environment, especially in the developed countries like US and Europe, which contributes more than 75% percent of the revenue of the Indian IT sector. Thus, if situation worsen in these regions, the growth prospect of the company may get adversely impacted.

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

May-13

Aug-13

Sep-13

Oct-13
10

Jan-13

Jul-13

Peer Comparison
Particulars CMP (closing on 7th Oct) Market Cap (INR BN) EV (INR Cr) No. of Shares o/s (no.) PE (x) FY14E EPS TTM EPS (INR) 5 year Avg PE (x) ROE (%) 5 year Avg ROE (%) Payout Ratio (%) Div Yield (%) OPM (%) Net Profit Margin (%) Revenue (INR mn) Net Income (INR mn)
Source: Networth Research

TCS 2,089 3,980 3,852,839 1,957 23.5 88.8 73.9 20.3 36.89 40.13 30.98 1.37 26.93 22.09 629,895 139,173

Infosys 3,021 1,732 1,530,036 571 16.0 189.0 166.4 20.4 23.44 30.05 25.58 1.68 25.88 23.37 403,520 94,290

HCL Tech 1,119 765 728,829 697 15.4 72.6 59.0 15.2 31.29 27.33 20.40 1.30 20.25 15.93 257,337 40,989

Wipro Tech Mahindra 482 1,190 1,091,851 2,463 16.5 29.3 26.6 18.3 22.71 25.29 28.11 1.64 17.51 17.73 374,256 66,359 1,443 326 333,306 128 11.8 122.1 100.9 10.0 32.60 34.56 4.98 0.49 18.23 18.74 68,731 12,878

As compared to large Cap IT companies TCS is trading at a premium, At CMP TCS currently trades at price to earning multiple of 21.9x at its FY15E EPS of Rs.95.5, which reflects a significant premium vs other large cap IT companies., as other large IT companies trade in the range of 1418x, which indicates TCS is trading at a premium to its peer group. We believe TCS to maintain its leadership position over the next two years, backed by a strong and satisfied client base.

P/E
25.0

TCS, 22.8

20.0

Wipro, 16.5

Infosys, 16.8

15.0

Cognizant, 19.0 HCL TECH, 15.1

10.0

TECH MAHINDRA, 11.5

5.0

0.0
Source: Networth Research

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

11

Nifty vs NSE IT vs TCS

CNX IT 170 160 150 TCS

140
130 120 110 100

90
80
1-Oct-12 15-Oct-12 29-Oct-12 12-Nov-12 26-Nov-12 10-Dec-12 24-Dec-12 7-Jan-13 21-Jan-13 4-Feb-13 18-Feb-13 4-Mar-13 18-Mar-13 1-Apr-13 15-Apr-13 29-Apr-13 13-May-13 27-May-13 10-Jun-13 24-Jun-13 8-Jul-13 22-Jul-13 5-Aug-13 19-Aug-13 2-Sep-13 16-Sep-13 30-Sep-13
Source: Company, Networth Research

TCS 170 160 150

Nifty

140
130 120 110 100

90
80
1-Oct-12 15-Oct-12 29-Oct-12 12-Nov-12 26-Nov-12 10-Dec-12 24-Dec-12 7-Jan-13 21-Jan-13 4-Feb-13 18-Feb-13 4-Mar-13 18-Mar-13 1-Apr-13 15-Apr-13 29-Apr-13 13-May-13 27-May-13 10-Jun-13 24-Jun-13 8-Jul-13 22-Jul-13 5-Aug-13 19-Aug-13 2-Sep-13 16-Sep-13 30-Sep-13
Source: Company, Networth Research

The stock has outperformed the market in past one year. CNX IT has given the return of 27% in past 12 months while TCS has given the return of 49% in last one year and the benchmark Nifty has gained only 1.1% in the same period. While the lack of a feasible investment option in a slowing economy and the benefit of weaker home currency to export oriented companies has helped the stock vault in a short period, the sharp jump raises concerns whether it would be able to sustain and add to its gains further in the near term.

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

12

Financial Summary

Particulars Sources Of Funds Shareholders Funds Share Capital Share Application Money Reserves & Surplus Total Shareholders Fund Minority Interest Long Term Borrowings Deffered Tax Liability Total loans Total Liabilities Application Of Funds Fixed Assets Gross Block Less: Depreciation Net Block Capital WIP Investments Deffered Tax Assets Current Assets Investories Sundry Debtors Cash And Bank balance Other Current Assets Loans & Advances Total Current Assets Less: Current Liabilities Current Liabilities Provisions Total Current Liabilities Net Current Assets Total Assets

Consolidated Balance Sheet INR Cr 2011A 2012A 2013A

2014E

2015E

296 24,209 24,505 458 38 109 363 25,435

296 29,284 29,579 559 115 173 618 30,929

296 38,350 38,646 695 131 235 848 40,424

296 49,589 49,885 695 170 235 1,099 51,915

296 61,738 62,034 695 187 235 1,208 64,172

7,792 3,545 4,247 1,194 1,079 160 23 8,195 4,701 2,151 1,967 17,036 4,527 2,719 7,246 9,790 25,435

9,448 4,329 5,119 1,446 578 256 18 11,520 6,003 3,478 2,255 23,275 5,671 4,794 10,465 12,810 30,929

11,623 5,376 6,247 1,895 968 310 21 14,077 6,769 4,888 5,821 31,577 7,609 4,233 11,843 19,734 40,424

15,045 6,945 8,100 1,895 2,449 310 82 19,013 8,947 4,899 8,164 41,104 8,981 4,233 13,214 27,890 51,915

18,805 9,051 9,754 1,895 2,691 310 90 21,136 16,326 5,831 8,971 52,353 9,868 4,233 14,101 38,252 64,172

Source: Company, Networth Research

Initiating Coverage

Networth Research is also available on Bloomberg and Thomson

13

Particulars Income from Operations growth Total Expenditure EBITDA EBITDA Margin Depreciation EBIT Interest Other Income PBT Tax PAT PAT Margin
Source: Company, Networth Research

Consolidated P&L INR CR 2011A 2012A 37,325 48,894 31.0% 26,146 34,459 11,178 14,435 29.9% 29.5% 735 918 10,443 13,517 26 22 604 428 11,021 13,923 1,831 3,400 9,068 10,413 24.3% 21.3%

2013A 62,989 28.8% 44,950 18,040 28.6% 1,080 16,960 48 1,178 18,090 4,014 13,917 22.1%

2014E 81,643 29.6% 56,981 24,662 30.2% 1,569 23,093 121 1,380 24,352 6,768 17,291 21.2%

2015E 89,705 9.9% 62,550 27,155 30.3% 2,106 25,049 133 1,412 26,329 7,322 18,691 20.8%

Particulars PAT Depreciation Non-Cash Adjustments Change in working capital Cash Flow from operation

Cash Flow Statement (INR in Cr) 2011A 2012A 2013A 9,068 10,413 13,917 735 918 1,080 -999 -1,260 -1,693 -2,190 -3,063 -1,689 6,614 7,008 11,615 -1,827 2,002 -1,637 -1,462 -4 -4,584 -70 -4,659 494 30 1,024 1,549 -2,007 447 -1,168 -2,727 -1 -3,880 -74 -3,955 326 119 1,549 1,993 -2,640 -520 -2,925 -6,086 -3 -5,703 -23 -5,729 -200 48 1,993 1,841

2014E 17,291 1,569 -5,978 12,881 -3,422 -1,481 -4,903 251 -6,052 -5,801 2,178 1,841 4,019

2015E 18,691 2,106 -2,983 17,814 -3,760 -242 -4,002 109 -6,542 -6,433 7,379 4,019 11,398

Capital Expenditure Change in Investment (Dec)/inc Other investing cash flows Cash Flow used in investing Issue of equity' Issue/Repay Debt Dividend paid Other financing cash flows Cash Flow from Financing Net Cash Adjustment of Exchange rate Opening Balance Closing Balance
Source: Company, Networth Research

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Particulars Revenues (INR Cr) EBITDA (INR Cr) Net profit (INR Cr) Capital Employed (INR Cr) Market Cap(INR Cr) Market Cap/Sales, x Gross Block (INR Cr) EPS, Rs CEPS, Rs BVPS, Rs P/E, x P/BV, x EV/EBITDA, x EV/Sales, x
Source: Company, Networth Research

Valuation Summary 2011A 2012A 37,325 48,894 11,178 14,435 9,068 10,413 25,435 30,929 355,236 355,236 9.5 7.3 7,792 9,448 46.33 53.21 50 58 125.2 151.1 39.2 34.1 14.5 12.0 31.7 24.5 9.5 7.2

2013A 62,989 18,040 13,917 40,424 355,236 5.6 11,623 71.11 77 197.5 25.5 9.2 19.6 5.6

2014E 81,643 24,662 17,291 51,915 355,236 4.4 15,045 88.34 96 254.9 20.5 7.1 14.4 4.3

2015E 89,705 27,155 18,691 64,172 355,236 4.0 18,805 95.50 106 316.9 19.0 5.7 13.0 3.9

Particulars EBIDTA % PAT % ROE % ROCE % ROA % Growth Ratios (%) Income growth EBITDA growth PAT growth Turnover Ratios Fixed Asset Turnover x Creditors Days Debtors Days
Source: Company, Networth Research

Ratios 2011A 2012A 29.9% 29.5% 24.3% 21.3% 37.0% 35.2% 41.1% 43.7% 35.7% 33.7% 280.9% 567.4% 689.9% 4.8 46.7 80.1 31.0% 29.1% 14.8% 5.2 34.4 86.0

2013A 28.6% 22.1% 36.0% 42.0% 34.4% 28.8% 25.0% 33.6% 5.4 36.1 81.6

2014E 30.2% 21.2% 34.7% 44.5% 33.3% 29.6% 36.7% 24.2% 5.4 37.0 85.0

2015E 30.3% 20.8% 30.1% 39.0% 29.1% 9.9% 10.1% 8.1% 4.8 37.0 86.0

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Company Profile
Currently, TCS is the largest firm in India providing IT services and solutions to a diverse set of global and regional clients through its 105 global delivery centers in 44 countries with a headcount of ~276,000 employees. It derives majority of the revenues (~56%) from US region followed by Europe (~27%) and Rest of the World (~17%). TCS clocked revenues of ~INR630bn in FY13 with EBIDTA of INR180bn and EPS of INR71. It marked revenues of 48% and 52% from Time &Material and fixed price contracts respectively. Revenues from offshore and onshore operations were registered at 51% and 44%, respectively. The company derives ~75% of its revenue from banking, insurance, manufacturing, retail and telecom verticals with the balance from energy & utilities, transportation, healthcare and others. Its vast service portfolio comprises application development and maintenance, business process management, consulting, infrastructure management, product engineering, system integration and testing services. Companys contract portfolio consists of both fixed price and time & money contracts, with increasing contribution from fixed price contracts over the past few quarters. The company has emerged as a pioneer in IT services industry and stands among top ten IT companies in the World.

Management Profile
Mr N. Chandrasekaran is the Chief Executive Officer (CEO) of TCS. He took over as CEO in October 2009. Prior to this position, he was the Chief Operating Officer and Executive Director. He joined TCS in 1987 and has over 20 years of experience in the software industry and business operations. He has a Bachelor's degree in Applied Sciences and a Master's Degree in Computer Applications. In April 2006, he was named by Consulting Magazine, US, as one of the top 25 most influential consultants in the world. Mr Rajesh Gopinathan, Chief Financial Officer (CFO) , joined TCS from Tata Industries and initially worked to drive TCS's newly established e-business unit in the United States. He was appointed as the CFO in February, 2013 and steps into the shoes of the legend, Mr S. Mahalingam who recently relinquished the post. Rajesh Gopinathan holds an Electronic Engineering degree from REC Trichy and a Post Graduate Diploma in Management from IIM, Ahmedabad.
Share Holding Pattern

Shareholders having more than 1%

Others Shareholding Pattern and Public 4%

Name of the shareholders

No. of Shares held

Shares as % of Total No. of Shares

MFs and DII's Holding 6%

FII's 16%

Life insurance corporation of India Franklin Templeton Investment Funds

Source: BSE

55,568,386 30,818,141

2.8% 1.6%

Promoter Holding 74%

Source: BSE

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News & Events in last one month

TCS has set up a digital enterprise unit in Silicon Valley to club its social, mobility, analytics and cloud (SMAC) computing technology services under a single roof. a move that may help it become the first Indian company to exceed $100 billion in market capitalization (Oct 2013) Goa picks TCS for criminal tracking projectL : TCS has bagged a five-year egovernance deal to electronically link up all police stations and provide real-time crime and criminal information in Goa. (Sep 2013) TCS edges out rivals to bag Rs 193-cr deal from I-T Dept Tata Consultancy Services has pipped Infosys and Wipro to bag a Rs 193 crore contract for setting up and managing a new software platform for the Income Tax Department, it is reliably learned. As part of the six-year contract, TCS will setup a new platform-the Income Tax Business Application (ITBA). While the platform will be ready in 12 months, the Tata group company will manage the project operations for five years. (Sep 2013) TCS bags project from Macau telecom firm: In the month of Sep 2013 TCS has been selected to deploy a new rating and billing system for CTM, a telecom service provider in Macau. The solution, which is to be deployed in three years, will allow CTM's customers to receive faster response to enquiries and enable them to better manage their services and bills, according to a press statement. (Sep 2013) TCS wins Nordic outsourcing deal: During 1st week of September 2013 TCS has won an outsourcing deal from DNB, Norway's largest financial services group, to render application maintenance and development services for six years. TCS will operate across DNB's channels and IT portfolio as part of the managed services contract. Financial details of the deal were not disclosed. In the Nordic region, TCS employs over 5,500 professionals (Sep 2013) TCS bags deal from Saudi Arabia: TCS have bagged a deal to implement its core banking platform at Saudi Arabia's National Commercial Bank. International media reports suggest that the contract, which is valid for two years, is part of the Jeddahbased institutions' strategy to develop electronic services and provide technologybased banking solutions. (Sep 2013) TCS selected for Rs 200-crore I-T project As part of its latest technology upgrade exercise, the income-tax (I-T) department has selected TCS to implement an I-T upgrade project worth Rs 200 crore. The five-year project involves upgrading the entire hardware and software of all the I-T department offices across the country. (Sep 2013)

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Networth Research: E-mail- research@networthdirect.com Research Analyst : Vikas Jain Land Line : 022-30641653

Key to NETWORTH Investment Rankings

Buy: Upside by>15, Accumulate: Upside by +5 to 15, Hold: Upside/Downside by -5 to +5, Reduce: Downside by 5 to 15, Sell: Downside by>15

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