TATA CONSULTANCY SERVICES

Tata Consultancy Services (TCS) is a global leader, multinational Information Technology service, consulting and business solutions company headquartered in Mumbai, Maharashtra.

TCS has been recognized by Brand Finance as one of the Big 4 Global IT Services Brands.

BSE Code

532540

NSE Code

TCS

Reuters Code

TCS.NS

INCEPTION

2000

IPO

2001

Industry

Information Technology Services

CMP (as on 23/09/2015)

2588.5

Stock Beta

0.5281

52 Week H/L

2455 / 2834

Market Cap (Cr)

506852.81

Equity Capital (Rs cr)

195.87

Face Value (Rs)

1.00

Average Volume

 

 

Shareholding Pattern (%)

Promoters

73.86

Non Institutions

26.14

Grand Total

100.00

Potential Catalysts
  • Well diversified client across geography.

  • Margins and ratios expected to improve

  • Efficiency and Higher service level due to streamlined process with Domestic business to focus more on profitability

Recommendation

With Superior project management skills, focus on measuring and monitoring quality and its planned expansion TCS will be able to grow over the next few years. We recommend BUY on the stock at CMP of Rs. 2588 to target of Rs. 2773 (115x FY16 EPS).

Financial Summary

Yearly Financial Statement

2014

2015

2016 E

2017 E

Revenue

83446.1

98368.07

109443.44

123777.84

EBIDTA

26789.53

28201.37

30760.20

34869.77

EBIT

25440.38

26402.68

28798.31

32645.77

Adjusted PAT

19163.87

21874.16

22475.67

25415.44

EPS

97.67

101.35

114.75

129.75

EBIDTA Margin

32.75%

29.80%

28.67%

28.28%

EBIT Margin

31.10%

27.90%

26.84%

27.86%

PAT Margin

22.97%

22.24%

20.54%

21.32%

BUSINESS DISCRIPTION

Tata Consultancy Services Limited (TCS) is an information technology (IT) services, consulting and business solutions organization. TCS offers a consulting-led, integrated portfolio of IT, Business Process Services (BPS), infrastructure, engineering and assurance services. It services portfolio comprises assurance services, business intelligence (BI) and performance management, business process services, consulting, digital enterprise, engineering and industrial services, enterprise security and risk management, enterprise solutions, iON business, IT infrastructure services, IT services, platform solutions and supply chain management, among others. TCS offers software, including Digital Software and Solutions, TCS BaNCS, TCS MasterCraft and TCS Technology Products. It serves various industries, including Banking and Financial Services, Energy, Government, Healthcare, High Tech, Insurance, Life Sciences, Resources, Retail and Consumer Products, Telecom, Travel, and Utilities.

Tata Consultancy Services Ltd. key Products/Revenue Segments include Information Technology & Consultancy Services which contributed Rs 72160.74 Cr to Sales Value (98.07% of Total Sales), Sale of Equipment & Software Licenses which contributed Rs 1417.32 Cr to Sales Value (1.92% of Total Sales), for the year ending 31-Mar-2015.

Revenue Distribution

 

In %

Mar-15

Dec-15

Mar-15

Financial Services

26.9

26.6

26.1

Manufacturing

33.3

32.9

33.4

Life science & Healthcare

10.4

11.1

11.2

Public Services

10.1

9.5

10.4

Retail & CPG

8.5

9.7

8.4

Telecommunications, Media & Entertainment

8.4

8.4

9

Others

2.3

1.8

1.5

 

MANAGEMENT & GOVERNANCE

Name

Designation

Cyrus Mistry

Chairman

N Chandrasekaran

Managing Director & CEO

Phiroz A Vandrevala

Director

Aman Mehta

Director

Venkatraman Thyagarajan

Director

Ron Sommer

Director

Ishaat Hussain

Director

Vijay Kelkar

Director

Suprakash Mukhopadhyay

Company Secretary

Clayton M Christensen

Director

O P Bhatt

Director

Aarthi Subramanian

Director

Shareholding pattern as on 30thJune, 2015

Category

No. of Shares

Percentage

Promoters

1,446,755,110

73.86

Foreign Institutions

327,472,033

16.72

General Public

78,544,268

4.01

Financial Institutions

77,192,004

3.94

NBFC and Mutual Funds

19,320,579

0.99

Other Companies

7,053,903

0.36

Others

1,871,257

0.1

Central Government

518,797

0.03

Foreign - OCB

28

0

 

Top funds like UTI, SBI MF, AXIS, HDFC, L&T, Franklin Templeton, J P Morgan have increased their stake in TCS over years which indicate positive demand for the stock.

Funds

Market Value

No of Shares

UTI Mutual Fund

1094.6963

4269404

SBI Mutual Fund

546.5259

2130537

AXIS Mutual Fund

526.4793

2053311

HDFC Mutual Fund

391.7968

1528018

DSP BlackRock Mutual Fund

391.0487

1525121

Birla Sun Life Mutual Fund

371.2903

1448062

Franklin Templeton Mutual Fund

313.8495

1224038

Motilal Oswal Mutual Fund

230.4511

898778

JM Financial Mutual Fund

228.5465

887409

L&T Mutual Fund

167.1401

651859

Company stats at glance

Sales

76213.41

 

 

Adj.NP

22276.21

EPS(Adjusted)

85.08

Equity

195.87

P/E

30.42

Market Capitalization

506852.81

EPS(TTM)

113.73

Book Value

231.87

P/E(TTM)

22.75

Dividend Yield-%

3.05

EV/EBIDTA

22.33

Face Value

1

EV/Sales

6.44

Enterprise Value

490623.16

P/BV

11.16

INDUSTRY OUTLOOK

Enterprise software is in the midst of a revolution. Today, everyone's a power user. 2014 was all about the “consumerization” of enterprise software -- software companies redefining the user experience to make technology more closely resemble consumer applications. This will continue in this year as developers move away from a purely utilitarian approach to creating software that’s more intuitive, more user-friendly and able to cater to users’ changing needs.

TRENDS IN DEMAND ENVIRONMENT Enterprise Software

  • Gartner estimate the $310bn spend in 2015 growing to $396bn in 2019

  • IT Services – Applications Services (Implementation) worth $158bn in 2015, growing to $177bn in 2019

  • Digitalization – $170bn market growth from 2014-2019. $36bn in digital consulting and implementation, $13bn in digital consulting

  • Increased investment – CEOs intend to raise investment in IT and Digital Capabilities more than any other aspect of their business in 2015.

Increase in global technology spending and opportunities created through adoption of disruptive technologies are expected to propel growth in FY2015. NASSCOM expects the industry to clock export revenues of USD 84-87 billion maintaining a growth rate of 12-14 per cent. Domestic revenues will also grow at a rate of 13-15 per cent and are expected to reach INR 1180-1200 bn.

INVESTMENT RATIONALE

Well diversified client across geography.

Tata Consultancy Services (TCS) maintained positive demand commentary and stated that its digital business is growing in double digits QoQ. Based on TCS’ guidance of 60,000 addition and 14% attrition assumption for FY16 we estimate net employee addition at approximately 5% and revenue growth of 11%. This reiterates our thesis that the sector will clock higher earnings growth than revenue growth led by productivity gains.

Growth by Market

North America

52.80%

Latin America

9.60%

UK

16.10%

Continental Europe

11.00%

India

6.40%

Asia Pacific

9.60%

MEA

1.90%

 

Geography

Q1 FY15

Q4 FY15

Q1 FY16

QoQ GROWTH

Yoy GROWTH

Americas

North America

52.2

52.4

52.8

4.4

11.4

Latin America

2.2

2.1

1.9

-5.1

5.4

Europe

UK

7.7

15.9

16.1

2.8

8.5

Continental Europe

12

11.1

11

2.2

19

 

India

6.3

6.6

6.4

2.6

15.9

Asia Pacific

7.6

9.8

9.6

2.6

58

MEA

2

2.1

2.2

8.1

25.3

 

Total

100

100

100

3.5

15.8

Growth by Domain

 

BFSI

40.60%

Retail & Distribution

13.80%

Manufacturing

9.90%

Telecom

8.60%

Life Sciences & Healthcare

6.90%

Hi-Tech

5.80%

Energy & Utilities

4.00%

Travel & Hospitality

3.50%

Media & Entertainment

2.50%

Others

4.40%

 

IP Revenue (%)

Q1FY15

Q4FY15

Q1FY16

Q-o-Q CCGrowth

Y-o-Y CCGrowth

BFSI

41.7

40.6

40.6

3.3

12.4

Retail & Distribution

13.8

13.6

13.8

5.1

15.5

Manufacturing

8.6

10.2

9.9

0.3

36

Telecom

9.4

8.8

8.6

9.6

8.2

Life Sciences & Healthcare

6.3

6.7

6.9

7

21.8

Hi-Tech

5.5

6

5.8

2.3

21.3

Energy & Utilities

3.9

3.9

4

5.5

22.2

Travel & Hospitality

3.6

3.4

3.5

6.1

16.7

Media & Entertainment

2.7

2.7

2.5

-6.7

0.9

Others

4.5

4.8

4.4

-4.2

13.7

Total

100

100

100

3.5

15.8

EBIT margin at 29.3% surpassed street’s estimate. BFSI, retail, telecom and life sciences posted robust growth, but manufacturing was flattish due to softness in Latin America and Japan. Rebound in Telecom in‐line with April commentary. The extent was a positive surprise which was mainly due to the distributed footprint between EM and Major market.

Positive thing is it has no direct exposure in Greece and not seeing any impact of Greek problems on Continental Europe.

Growth by Service Line

Application Development & Maint.

40.30%

Enterprise Solutions

15.10%

Assurance Services

8.50%

Engineering & Industrial Services

4.50%

Infrastructure Services

14.70%

Global Consulting

2.90%

Asset Leveraged Solutions

2.50%

Business Process Services

11.50%

 

Q1 FY15

Q4 FY15

Q1 FY16

Q-o-Q CC Growth

Y-o-Y CC Growth

IT Solutions and Services

 

Application Development & Maint.

40.8

40.1

40.3

4.1

14.2

Enterprise Solutions

15.9

15.4

15.1

1.3

9.8

Assurance Services

8.6

8.4

8.5

3.8

12.7

Engineering & Industrial Services

4.5

4.5

4.5

2.7

12.7

Infrastructure Services

12.6

14.5

14.7

5.1

36

Global Consulting

3.2

3.2

2.9

-7.7

6.3

Asset Leveraged Solutions

2.5

2.3

2.5

17.7

22.2

Business Process Services

11.9

11.6

11.5

2.4

12.8

Total

100

100

100

3.5

15.8

Margins and ratios expected to improve

Tata Consultancy Services (TCS) maintained positive demand commentary and stated that its digital business is growing in double digits QoQ. Based on TCS’ guidance of 60,000 addition and 14% attrition assumption for FY16 we estimate net employee addition at approximately 5% and revenue growth of 11%. This reiterates our thesis that the sector will clock higher earnings growth than revenue growth led by productivity gains.

 

Infosys

Wipro

HCL Tech

Tech M

MphasiS

TCS

LTP

1160.45

597.15

982.15

558.05

409.4

2587.7

(in Cr.)

201503

201503

201406

201503

201503

201503

View in (Million)

 

 

 

 

 

 

Sales

53319

46951

32143.66

22621.3

5794.81

94648.41

PAT

12373

8714

6507.76

2658.6

674.64

20059.7

Equity

572

493.7

140

480.4

210.15

195.87

OPM %

34.35

27.15

27.11

18.83

18.36

29.79

NPM %

23.21

18.56

20.25

11.75

11.64

21.19

EPS

99.12

32.9

91.35

26.44

28.85

88.96

PE

20.57

17.79

16.1

22.75

11.91

24.87

P/BV

5.02

4.18

5.36

4.94

1.47

9.85

P/EPS

19.01

15.76

14.57

18.67

10.4

23.04

BV

443.5

150.26

279.17

127.48

260.76

258.51

We believe the company can improve its utilization rate due to rising automation and non‐linearity, scope for it here onwards will be gradual and slow, which caps positive margin surprises going forward.

Domestic business to focus more on profitability

During the year under review, the company has increased number of sizable customers for products and services business. It has also won multi-year contracts for infrastructure Managed services from its clients. The company has consolidated its position in the Indian market and attained top position in most of the business lines in which it is dealing. Company’s strategy for the current financial year is to add and retain more customers and provide more value added services to them. It is also planning to add more value added products to its portfolio which can generate higher returns.

Tata Consultancy Services (TCS) strategy of addressing select enterprise class clients paid rich premium. Its relationship with enterprise clients have become deeper and have extended the engagements in multiple technology and service offerings. A notable client win in the non-ERP services is a large travel house where the company is developing an end-to-end solution to meet their business needs.

Clients Contribution

Q1 FY15

Q4 FY15

Q1 FY16

US$ 1m+ Clients

724

791

804

US$ 5m+ Clients

359

389

391

US$ 10m+ Clients

244

261

268

US$ 20m+ Clients

144

162

172

US$ 50m+ Clients

58

68

69

US$ 100m+ Clients

24

29

30

Consistent Dividend History

One of the advantages to shareholders in the respect of stock dividends is the tax benefit. The receipt of the stock dividends by the shareholder is not taxable as income. The payment of stock dividend is normally interpreted by shareholders as an indication of higher profitability.

In the present unpredictable market conditions, picking stocks with high dividend yields is a good strategy for those who are here to invest with a long-term goal as such stocks gives investors fairly regular dividends, plus the capital appreciation could also be fairly good.

Year

Ratio

Book Value -Unit Curr

2009

1:01

136.38

2006

1:01

114.64

 

Year End

Dividend-Amount(Cr)

Dividend-%

Div. Yield-%

201503

15473.87

7900

3.1

201403

6267.33

3200

1.5

201303

4305.88

2200

1.4

201203

4893.04

2500

2.14

201103

2740.1

1400

1.18

201003

3914.43

2000

2.56

200903

1370.05

1400

2.59

200803

1370.05

1400

1.73

200703

1125.39

1300

0.93

200603

660.56

1350

0.71

200503

552.13

1150

0.8

 

VALUATION

Tata Consultancy Services (TCS) is currently trading at 2588.5 per share with a market capitalization of 506852.81 Cr. It has total debt of 1122.89 Cr with long term Debt to Equity of 0.01. Most of the debt is used for working capital. It has total cash and bank balance of 18556.04 Cr making debt to cash ratio of 0.06.

Key Ratios

201403

201503

Debt-Equity Ratio

0

0

Long Term Debt-Equity Ratio

0

0

Current Ratio

2.59

2.54

 

Interest Cover Ratio

1006.74

309.53

EBIDTA M (%)

38.11

35.37

EBIT M (%)

36.44

33.47

PATM (%)

28.57

26.17

ROCE (%)

60.13

53.73

RONW (%)

48.22

43.05

Payout (%)

35.49

92.85

We value TCS using DCF at price target of 2773 for FY16 with expected growth rate at 13.36% per annum. Comparative analysis also shows it is trading cheep with some of its peers.

For valuation we assume that over the period company will keep capital structure unaltered and tax rate unchanged.

 

TCS

AVERAGE

OPM %

29.79

25.16

NPM %

21.19

17.082

EPS

88.96

55.732

PE

24.87

17.824

P/BV

9.85

4.194

P/EPS

23.04

15.682

BV

258.51

252.234

CONCUSSION AND RECOMMENDATION

With Superior project management skills, focus on measuring and monitoring quality and its planned expansion TCS Technologies will be able to grow over the next few years. We recommend BUY on the stock at CMP of Rs. 2588 to target of Rs. 2773 (115x FY16 EPS).

RISKS AND CONCERNS
  • TCS, by ideals of vicinity in various geologies and verticals, is skating in a dangerous situation, wherein a miss from any vertical/topography/administration is sufficient to imprint the development rate.

  • TCS deals in the world-wide market. The different market dynamics have a slight bearing on the operations of the company. The Gains of TCS Technologies is significantly inter-linked with the growth of the Banking Industry all over the Globe.

  • Increase in competition and pressure on pricing

    As competition increases, acquiring and retaining customers would be challenging. In a highly competitive environment, customers have tough expectations on pricing.

  • The rapidly developing markets and the Competition in the market is a major concern for TCS

FINANCIALS

Tata Consultancy Services Ltd., incorporated in the year 1995, is a Large Cap company (having a market cap of Rs 506860.04 Cr.) operating in Information Technology sector.

For the quarter ended 30-Jun-2015, the company has reported Standalone sales of Rs. 20073.78 Cr., up 6.79% from last quarter Sales of Rs. 18798.23 Cr. and up 15.11% from last year same quarter Sales of Rs. 17438.43 Cr. Company has reported net profit after tax of Rs. 5488.97 Cr. in latest quarter.

 

201303

201403

201503

201606

201706

201806

Net Sales

62989.48

81809.36

94648.41

107293.44

121627.84

137877.32

Other Income

1178.23

1636.74

3719.66

2150.00

2150.00

2150.00

Total Income

64167.71

83446.1

98368.07

109443.44

123777.84

140027.32

Total Expenditure

44949.57

56656.57

70166.7

78066.84

88291.68

99882.56

EBIDTA

19218.14

26789.53

28201.37

30760.20

34869.77

39528.37

Interest

48.49

38.52

104.19

115.92

131.10

148.31

Depreciation

1079.92

1349.15

1798.69

1961.89

2224.00

2521.13

EBIT

18138.22

25440.38

26402.68

28798.31

32645.77

37007.24

PBT

18089.73

25401.86

26298.49

29298.78

33131.05

37475.31

Tax

4014.04

6069.99

6238.79

6592.23

7454.49

8431.95

Reported Profit After Tax

14075.69

19331.87

20059.7

22706.55

25676.56

29043.37

Minority Interest After NP

158.38

168

207.52

230.88

261.13

295.41

Adjusted PAT

13917.31

19163.87

21874.16

22475.67

25415.44

28747.96

 

 

Equity

195.72

195.87

195.87

195.87

195.87

195.87

EPS (Adj) (Unit Curr.)

70.99

97.67

101.35

114.75

129.75

146.77

EBIDTA Margin

30.51%

32.75%

29.80%

28.67%

28.28%

29.75%

EBIT Margin

28.80%

31.10%

27.90%

26.84%

27.86%

28.69%

PAT Margin

21.69%

22.97%

22.24%

20.54%

21.32%

21.35%

 

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DISCLAIMER

This report is only for the information of our customers. Recommendations, opinions, or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.

 

 

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