8 September 2016
Update
| Sector:
Technology
TCS
BSE SENSEX
29,045
S&P CNX
8,953
CMP: INR2,321
TP: INR2,500 (+8%)
Neutral
Yet another company cites burgeoning growth concern
We cut FY17E/18E earnings by 2.6%/3.8% and USD revenue by 1%/1.7%
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, (INR m)
Free float (%)
TCS IN
1970.4
2,769/2,119
-16/-19/-23
4573.7
68.9
2,918
26.7
Weakness in BFSI discretionary spending in the US is likely to result in sequential
momentum loss.
Pull back in discretionary spending will hurt margins too, in our view.
We now expect constant currency (CC) revenue growth of 2.7% in 2QFY17 v/s
3.6% earlier, and cut our FY17E/18E USD revenues by 1%/1.7% and earnings by
2.6%/3.8%.
Loss of sequential momentum led by US BFSI
Financials Snapshot (INR b)
2016 2017E 2018E
Y/E Mar
Net Sales 1,086.5 1,220.6 1,397.2
306.8
329.6
376.2
EBITDA
242.1
257.1
290.3
Net Profit
123.2
130.5
147.3
EPS (INR)
11.2
6.0
12.9
EPS Gr.(%)
371.4
422.1
501.5
BV/Sh INR
18.8
17.4
15.4
P/E (x)
6.4
5.3
4.5
P/BV (x)
38.2
33.3
31.4
RoE (%)
36.8
32.3
30.5
RoCE (%)
Shareholding pattern (%)
As On
Jun-16 Mar-16 Jun-15
Promoter
73.3
73.4
73.9
DII
5.2
5.2
7.3
FII
17.0
16.8
14.4
Others
4.5
4.6
4.5
FII Includes depository receipts
Stock Performance (1-year)
TCS
Sensex - Rebased
3,200
2,900
2,600
2,300
2,000
In its recent update, TCS characterized customer outlook as one marked by
abundant caution, with some holding back of discretionary spending –
particularly in the BFSI vertical in the US – leading to sequential loss of
momentum.
We believe the pull back in discretionary spending will weigh on margins
too, derailing the company at least for FY17, from its targeted margin band
of 26-28%. TCS started the year at 25.1%, and the loss of momentum in 2Q
will mean another quarter of soft margins, heading into the seasonally
weak 2H with furloughs and budgeting cycle.
Cutting earnings by 2.6%/3.8% for FY17E/18E
Following the outlook warning, we have revised our estimates downward. We
now expect CC revenue growth in 2Q of 2.7% QoQ (from earlier estimate of
3.6%) and USD revenue growth of 1.9% QoQ (80bp impact from cross
currency). As we were already treading cautiously on our margin estimates, our
EBIT margin estimates are only marginally revised to 25.4% for both 2QFY17
(down by 40bp) and FY17 (earlier 25.6%). Our earnings estimates for FY17/FY18
are consequently down 2.6%/3.8% to INR130.5b/INR147.3b.
Exposure to BFSI keeps us cautious
Our cautious thesis on TCS can be attributed to its slightly higher than peers
exposure to both BFSI and the UK. With headwinds from Diligenta and Latin
America behind, the uncertain environment in BFSI is taking a toll on growth
this year. Digital has contributed 52% of incremental revenues since 1QFY16,
and thus any pause/delay in discretionary spending is bound to hurt growth.
Following the adjustments, we now expect TCS to record USD revenue CAGR of
9.8% and EPS CAGR of 9.4% over FY16-18. Our revised target price of INR2,500
discounts FY18 EPS by 17x, and implies 8% upside. Maintain
Neutral.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 6129 1530
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 6129 1531

TCS
Valuation and view
Over FY11-15, TCS had led the incremental revenues as well as operating
profits not just domestically, but also in the global arena (compared to peers
multiple times its size). However, weak areas like Diligenta, Japan and India /
Latin America saw the company cede its growth leadership to peers such as
CTSH and INFO last year.
During the period of outperformance, TCS’ traction has been impressively
broad-based, unlike select pockets of stress across its peer group. However,
over the past 12 months, some factors that have led relative softness in
performance v/s the company’s expectations have had secular elements
(Energy, Telecom and Insurance at large), as well as company-specific
headwinds (India, Japan and Diligenta in particular). Geographically,
although the company sees some stability in Latin America and India, while
Japan may still take a while before delivering growth.
The growth outperformance to industry peers has waned, but it is well
invested building Digital capabilities to recoup that advantage. The higher
base that TCS now operates at is deterrent, however. While multiple
portfolio issues started getting resolved, BFSI has now appeared as a drag.
Recent macroeconomic developments have resulted in decision making
delays and some slowdown on discretionary spend. This development caps
TCS’ prospect to revert to mid-teens growth despite Digital prowess and
resolution of other issues.
With headwinds from Diligenta and Latin America behind, BFSI’s emergence
as the new drag is likely to mar the progress on growth. Digital has 74% of
the incremental revenues since 2QFY16, suggesting that any pause / delay in
discretionary spending may hurt growth further. Following the adjustments
to revenues, we now expect TCS to grow its FY16-18 USD revenues at a
CAGR of 9.8% and EPS at a CAGR of 9.4% during this period. Our target price
of INR2,500 discounts FY18 EPS by 17x, and implies 8% upside.
Neutral.
Key triggers
Turnaround in weak areas – Diligenta | Japan
Digital-led resurgence in growth leadership
Recovery in margins in the near term
Key risk factors
Further deceleration in YoY CC growth to single digits
Rapid appreciation in INR
Intensification of pricing pressure
8 September 2016
2

TCS
Exhibit 1: TCS 1 year forward PE chart
30
24
18
12
6
7.0
17.9
PE (x)
Median(x)
Peak(x)
Min(x)
18.4
Avg(x)
25.8
17.3
Exhibit 2: TCS 1-year forward PB chart
11.5
9.5
7.5
5.5
3.5
1.5
6.2
5.9
2.3
5.3
PB (x)
Median(x)
Peak(x)
Min(x)
Avg(x)
10.5
Source: Company, MOSL
Source: Company, MOSL
Exhibit 3: TCS: Change in estimates
Change in Estimates
INR/USD
USD Revenue - m
USD revenue growth (%)
EBIT Margin (%)
EPS - INR
Revised
FY17E
67.8
18,003
8.8
25.4
130.5
FY18E
70.0
19,960
10.9
25.5
147.3
Earlier
FY17E
FY18E
67.8
70.0
18,168
20,303
9.8
11.8
25.6
25.7
134.0
153.1
Change
FY17E
0.0%
-0.9%
-99bp
-20bp
-2.6%
FY18E
0.0%
-1.7%
-93bp
-22bp
-3.8%
Source: Company, MOSL
8 September 2016
3

TCS
Story in charts
Exhibit 4: Outperformance to peers has waned…
TCS
Infosys
Wipro (IT Services)
HCL Tech
Exhibit 5: … India business remains a focus but volatile
India (INR)
International (USD)
FY11
FY12
FY13
FY14
FY15
FY16
Exhibit 6: Revenue
headcount…
180
160
140
120
100
growth
finally
getting
delinked
to Exhibit 7: ...as competitive intensity gradually pulls down
pricing
102
100
98
96
94
Picing indexed at 100
Headcount
USD revenues
Exhibit 8: Operating
utilization…
at
peak
efficiency,
reflected
in
Exhibit 9: ..Margins within the target range
SGA (% of Revenues)
30.2 29.7
29.1
27.0
27.2
26.3 26.8 27.0
EBIT Margin (%)
27.1 26.6
26.1
Util Excl. Trainees (%)
Util Incl. Trainees (%)
86.2 86.7 85.4
86.0
84.9
84.9
84.3 83.8 85.3
82.7 83.4
81.3 82.1 81.5 82.0 82.3 80.9
25.1
25.1
72.5
75.0
77.5 77.9
79.8
18.6
17.3 17.9 17.1 17.5 17.0 17.3
17.1 16.7 17.3 17.0 17.1
16.3
Source: Company, MOSL
Source: Company, MOSL
8 September 2016
4

TCS
Exhibit 10: Operating Metrics
Service Lines (%)
ADM
Engineering and Industrial Services
Infrastructure Services
Enterprise Solutions
Global Consulting
Enterprise Solutions & Consulting
Asset Leverage Solutions
Assurance Services
BPO
Industry Verticals (%)
BFSI
Manufacturing
Telecom + Media
Life Sciences & Healthcare
Retail & Distribution
Transportation
Energy and Utilities
Hi-Tech
Others
Geographies (%)
America
UK
Rest of Europe
Europe
India
APAC
Latin America
MEA
Others
Revenue Mix (%)
Offshore
Onsite
GDC
Utilization
Excluding Trainees
Including Trainees
Total Employees
Trainee Additions
Lateral Additions
Overseas Additions
Gross Additions
Net Additions
Attrition (LTM %)
1QFY15
40.8
4.5
12.6
15.9
3.2
19.1
2.5
8.6
11.9
2QFY15
40.5
4.6
13.8
15.6
3.2
18.8
2.3
8.4
11.6
3QFY15
39.5
4.5
14.3
15.4
3.7
19.1
2.4
8.5
11.7
4QFY15
40.1
4.5
14.5
15.4
3.2
18.6
2.3
8.4
11.6
1QFY16
40.3
4.5
14.7
15.1
2.9
18.0
2.5
8.5
11.5
2QFY16
40.0
4.5
14.7
15.0
2.5
17.5
3.2
8.7
11.4
3QFY16
39.7
4.5
15.2
0.0
0.0
17.4
2.8
8.6
11.8
4QFY16
39.4
4.7
15.2
0.0
0.0
17.1
3.2
8.8
11.6
1QFY17
38.5
4.8
15.5
0.0
0.0
17.7
3.2
8.8
11.5
41.7
8.6
12.1
6.3
13.8
3.6
3.9
5.5
4.5
40.4
10.1
11.6
6.3
13.5
3.5
4.3
5.7
4.6
40.5
10.1
11.6
6.4
13.4
3.5
4.2
5.9
4.4
40.6
10.2
10.8
6.7
13.6
3.4
3.9
6.0
4.8
40.6
9.9
11.1
6.9
13.8
3.5
4.0
5.8
4.4
40.5
9.8
10.8
7.0
13.8
3.6
4.0
5.9
4.6
40.5
9.9
10.9
7.3
13.8
3.6
4.1
6.0
3.9
40.9
10.4
10.8
7.3
14.1
3.7
4.1
5.6
3.1
40.4
10.4
11.3
7.3
14.0
3.9
4.2
5.4
3.1
52.2
17.7
12.0
29.7
6.3
7.6
2.2
2.0
18.1
51.0
17.1
11.5
28.6
6.5
10.1
1.9
1.9
20.4
51.9
16.1
11.7
27.8
6.5
9.7
2.1
2.0
20.3
52.4
15.9
11.1
27.0
6.6
9.8
2.1
2.1
20.6
52.8
16.1
11.0
27.1
6.4
9.6
1.9
2.2
20.1
52.7
16.4
10.8
27.2
6.5
9.4
1.8
2.4
20.1
53.5
15.9
10.9
26.8
6.0
9.4
2.1
2.2
19.7
54.0
14.9
11.2
26.1
5.9
9.6
2.0
2.4
19.9
53.5
14.8
11.5
26.3
6.2
9.6
2.0
2.4
20.2
47.2
47.1
5.7
45.7
48.9
5.4
46.0
48.2
5.8
46.0
48.5
5.5
85.3
79.8
305,431
3,452
8,488
3,877
15,817
4,967
12.0
86.2
81.3
313,757
7,583
8,924
3,843
20,350
8,326
12.8
86.7
82.1
318,625
5,529
6,129
4,903
16,561
4,868
13.4
85.4
81.5
319,656
5,569
5,853
2,973
14,395
1,031
14.9
86.3
82.9
324,935
6,425
9,337
4,540
20,302
5,279
15.9
86.0
82.3
335,620
9,943
10,978
4,265
25,186
10,685
16.2
84.9
80.9
344,691 353,843 362,079
7,593
8,623
5,038
10,451
10,659
9,877
4,074
3,294
2,877
22,118
22,576
17,792
9,071
9,071
9,071
15.9
15.5
13.6
Source: Company, MOSL
8 September 2016
5

TCS
Exhibit 11: Operating Metrics
QoQ growth (%)
Service Lines
ADM
Engineering and Industrial Services
Infrastructure Services
Enterprise Solutions & Consulting
Asset Leverage Solutions
Assurance Services
BPO
Industry Verticals
BFSI
Manufacturing
Telecom
Life Sciences & Healthcare
Retail & Distribution
Transportation
Energy and Utilities
Media & Entertainment
Hi-Tech
Others
Geographies
America
UK
Rest of Europe
Europe
India
APAC
Latin America
MEA
Others
Offshore
Onsite
GDC
Overall International business
Domestic Business
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
2.2
3.0
3.0
2.3
-11.2
31.8
5.4
3QFY16
4QFY16
1QFY17
1.3
5.9
5.7
0.0
0.0
3.7
3.7
4.9
-1.1
10.7
6.8
-0.7
1.4
8.0
5.6
8.7
16.5
4.3
6.4
-2.2
3.9
-2.4
-2.1
3.7
-1.2
15.7
4.4
1.2
0.7
-0.8
0.6
-0.8
-14.2
-4.9
-2.0
4.0
3.5
4.9
1.5
-6.2
12.5
4.7
-1.0
-0.3
3.1
0.0
0.0
-12.7
-1.4
0.7
6.0
1.5
0.0
0.0
16.0
3.9
2.5
5.5
6.6
8.9
7.8
8.5
8.2
9.5
9.4
7.9
3.0
24.9
0.7
6.4
4.0
3.4
17.3
6.4
10.2
8.7
0.3
0.1
0.1
1.6
-0.7
0.1
-2.3
0.1
3.6
-4.3
-0.5
0.2
-9.7
3.9
0.7
-3.6
-7.9
-0.8
0.9
8.2
3.5
0.5
9.9
6.6
5.0
6.5
6.2
-4.2
0.0
-5.1
2.7
1.9
0.6
4.5
3.0
5.9
3.0
-1.2
4.7
7.6
-0.3
0.7
-0.3
4.0
-0.3
-0.3
2.2
3.9
1.4
-15.5
2.5
6.6
0.3
1.5
3.7
4.3
1.5
1.5
-5.3
-19.3
2.4
3.7
9.9
3.7
2.9
9.3
6.2
3.7
0.0
3.7
5.5
4.9
4.6
4.8
7.2
8.3
5.5
0.4
6.6
4.9
5.6
7.2
5.4
6.9
3.9
2.7
1.9
2.4
9.7
41.3
-8.1
1.0
19.9
2.7
10.2
0.5
6.1
9.9
1.8
-5.8
1.8
-2.7
0.1
-3.9
10.6
5.3
-0.4
0.7
-1.4
7.5
0.1
0.0
0.2
-2.0
-5.9
-3.6
0.7
0.2
-0.8
4.2
0.7
-0.9
-0.3
-6.0
-0.9
0.4
4.3
4.8
2.6
3.9
0.4
1.4
-6.4
8.4
1.0
3.7
3.7
3.7
3.7
0.6
2.8
4.9
1.1
3.3
4.6
0.8
-2.5
12.3
3.0
1.2
-3.3
0.6
-1.7
-7.9
-0.3
16.3
-8.6
-2.3
2.5
-4.9
4.3
-1.1
-0.2
3.7
-3.3
10.7
2.5
2.7
3.0
6.5
4.5
9.0
3.7
3.7
3.7
5.2
2.9
4.5
0.3
-8.2
1.6
0.4
3.4
8.7
Source: Company, MOSL
8 September 2016
6

TCS
Financials and Valuations
Income statement
Y/E March
Sales
Change (%)
Cost of Services
SG&A Expenses
Provisions
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
Eq. in earnings of affiliates
Minority Interest
PAT
Extraordinary
Net Income
Change (%)
2011
373,245
24.3
198,505
62,848
0
111,892
30.0
7,990
5,247
109,149
21,203
19.4
-3
1,116
86,827
0
86,827
26.3
2012
488,938
31.0
258,773
85,988
0
144,177
29.5
9,036
4,041
139,182
31,688
22.8
0
1,110
106,384
0
106,384
22.5
2013
629,895
28.8
332,545
116,480
0
180,870
28.7
10,792
11,174
181,252
40,344
22.3
0
1,494
139,413
0
139,413
31.0
2014
818,094
29.9
422,065
144,707
0
251,322
30.7
13,243
15,891
253,969
60,712
23.9
0
2,089
191,168
0
191,168
37.1
2015
946,484
15.7
512,565
160,978
0
272,941
28.8
18,698
31,393
285,636
66,564
23.3
0
2,114
216,958
20,477
237,435
13.5
2016
1,086,462
14.8
595,489
184,193
0
306,780
28.2
18,879
30,498
318,399
75,026
23.6
0
1,227
242,146
0
242,146
11.6
(INR Million)
2017E
1,220,603
12.3
681,521
209,498
0
329,584
27.0
19,501
28,241
338,324
81,174
24.0
0
4
257,146
0
257,146
6.2
2018E
1,397,211
14.5
786,301
234,747
0
376,163
26.9
20,188
25,993
381,968
91,672
24.0
0
4
290,292
0
290,292
12.9
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Preference shares
Minority Interest
Loans
Capital Employed
Gross Block
Less : Depreciation
Net Block
CWIP
Other LT Assets
Investments
Curr. Assets
Debtors
Cash & Bank Balance
Other Current Assets
Current Liab. & Prov
Current Liabilities
Net Current Assets
Application of Funds
E: MOSL Estimates
2011
1,957
250,432
252,389
1,000
4,663
10,718
268,771
86,156
33,816
52,340
89,929
18,390
171,948
95,479
47,401
29,068
63,837
63,837
108,111
268,771
2012
1,957
323,276
325,233
1,000
5,276
12,306
343,815
107,400
42,852
64,548
110,269
0
237,173
137,469
34,617
65,087
68,175
68,175
168,998
343,815
2013
1,957
407,524
409,481
1,000
6,561
10,894
427,936
135,587
53,644
81,944
88,815
33,765
315,022
172,366
79,035
63,621
91,609
91,609
223,413
427,936
2014
1,959
551,393
553,352
0
6,905
12,561
572,817
170,530
66,887
103,644
118,105
37,673
429,703
222,360
156,495
50,848
116,308
116,308
313,395
572,817
2015
1,959
572,808
574,767
0
9,136
19,004
602,907
201,300
85,585
115,716
137,276
7,283
489,263
242,670
197,713
48,881
146,630
146,630
342,633
602,907
2016
1,970
729,929
731,899
0
3,542
14,092
749,533
222,363
104,464
117,900
154,507
7,831
631,890
280,646
292,021
59,223
162,594
162,594
469,296
749,533
(INR Million)
2017E
1,970
829,522
831,492
0
3,450
14,831
849,772
263,320
123,965
139,356
151,111
7,510
730,204
314,768
311,385
104,051
178,408
178,408
551,796
849,772
2018E
1,970
985,998
987,968
0
3,450
16,852
1,008,270
291,510
144,153
147,358
170,817
7,510
883,368
359,568
404,939
118,860
200,783
200,783
682,585
1,008,270
8 September 2016
7

TCS
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout %
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Fixed Asset Turnover (x)
2011
44.4
48.4
129.5
14.0
31.6
52.3
47.9
40.1
12.0
17.9
0.6
37.4
35.7
44.2
81
7.9
2012
54.4
59.0
166.7
25.0
46.0
42.7
39.4
31.4
9.2
13.9
1.1
36.7
35.1
40.8
87
8.4
2013
71.2
76.7
209.7
22.0
30.9
32.6
30.2
24.6
7.1
11.1
0.9
37.8
36.5
42.4
90
8.6
2014
97.6
104.4
282.5
32.0
32.8
23.8
22.2
17.4
5.3
8.2
1.4
39.7
38.6
52.2
88
8.8
2015
110.8
120.3
293.4
79.0
71.3
21.0
19.3
16.0
4.6
7.9
3.4
38.5
37.8
50.2
90
8.6
2016
123.2
132.5
371.4
43.4
35.2
18.8
17.5
14.0
3.9
6.2
1.9
37.1
36.8
51.9
88
9.3
2017E
130.5
140.4
422.1
46.5
35.6
17.8
16.5
13.0
3.5
5.5
2.0
32.9
31.7
48.1
89
9.5
2018E
147.3
157.6
501.5
56.2
38.1
15.8
14.7
11.1
3.0
4.6
2.4
31.9
30.0
48.0
88
9.7
Cash Flow Statement
Y/E March
CF from Operations
Cash for Working Capital
Net Operating CF
Net Purchase of FA
Free Cash Flow
Net Purchase of Invest.
Net Cash from Invest.
Proc. from equity issues
Proceeds from LTB/STB
Dividend Payments
Cash Flow from Fin.
Net Cash Flow
Opening Cash Bal.
Add: Net Cash
Closing Cash Bal.
E: MOSL Estimates
2011
94,817
7,009
101,826
-53,633
48,193
19,409
-34,224
0
1,608
-32,058
-30,449
37,152
10,249
37,152
47,401
2012
115,419
-49,352
66,066
-41,584
24,483
18,390
-23,193
0
1,588
-57,246
-55,658
-12,785
47,401
-12,785
34,616
2013
150,205
-13,501
136,704
-6,733
129,971
-33,765
-40,498
0
-1,412
-50,377
-51,788
44,418
34,616
44,418
79,034
2014
204,411
12,834
217,246
-64,233
153,012
-3,909
-68,142
0
1,666
-73,310
-71,643
77,461
79,034
77,461
156,494
2015
215,179
25,257
240,437
-49,941
190,496
30,391
-19,550
0
6,444
-186,113
-179,670
41,217
156,494
41,217
197,712
2016
261,025
-32,355
228,670
-38,294
190,376
-548
-38,842
12,778
-4,913
-103,385
-95,519
94,309
197,712
94,309
292,020
(INR Million)
2017E
276,647
-63,136
213,511
-37,561
175,951
321
-37,240
-46,853
739
-110,793
-156,907
19,364
292,020
19,364
311,384
2018E
310,480
-37,235
273,245
-47,896
225,349
0
-47,896
0
2,021
-133,816
-131,794
93,554
311,384
93,554
404,938
8 September 2016
8

TCS
NOTES
8 September 2016
9

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