In an interview, Abhishek Shindadkar, IT Analyst of ICICI Securities, shares his views on TCS Q4 earnings, its hiring targets and how FY12 as a whole would pan out for TCS. Excerpts:
A disappointment there on the quarter on quarter numbers front, but it has still significantly done well for themselves at least on the FY11 numbers. What was your outlook when you first saw the initial numbers?
See the initial reaction to numbers is that it is a good set of numbers. They are ahead of our estimates at least and a 5.1% revenue growth is decent considering that Q1 of calendar is typically a seasonally slow quarter.
So decision-making takes time and the spending is not as robust as you might change some of the other quarters. Prima-facie, I would say it is a good set of numbers. That is what my initial reaction would be.
Do you think there would be a bit of a disappointment coming in which is reflecting in the stock reaction of the bonus issue not being announced this time around?
Those expectations are always difficult to fulfill at all the times, but yes what is leading to the decline in the stock price is primarily a high level of expectations from the stock on every quarter.
And when the consensus is very high relative to what the firm is saying, then you might see people saying that it is a disappointment but considering that this is a seasonally weak quarter, I would say it is a good set of numbers.
What is your sense there is of course focus going to be on their hiring guidance going forward? In terms of what they do from an FY12 perspective is also going to be key because like you pointed out this has really been an outperformer of sorts quarter on quarter even in terms of stock price movements. Do you think TCS would perhaps give a better indication about things in FY12, particularly on the hiring front?
Yes, it is. A lot of people would be keen to hear what Chandra says because in the last four or five quarters their commentary has led to the precedence in the movement in the IT sector.
In terms of hiring targets this year, they will likely hire around 50,000 gross additions which is a very steep number and what they hire next year and how are they going to do on their utilisation front and a couple of other matrix would be your keen thing to watch look out for.
What would you do with TCS at 1200?
TCS continues to be our top pick within the IT space, primarily because it looks in much better shape than some of its other peers. It did its restructuring back in 2008 and it has grown faster than some of the other peers in the last five quarters.
Any decline in the stock price gives you a decent opportunity to enter and we still maintain it as a buy with a price target of around 1280.
Could the disappointment be largely on account of the fact that the expectations after what HCL Tech did were probably high?
It would be largely unfair to compare on a same base because the base for TCS and HCL is different.
A couple of people that we spoke to two days before the results mentioned that expectations from TCS would be high because for the last three quarters they have managed to surprise the street. As I see the Q4 numbers are not really that disappointing...
It is always a case of high expectations set at the start. Most of the streets have expected closer to 5% dollar growth. So 5.1% is probably in line with the expectation.
However, given that HCL showed significant upside to its numbers, people were expecting that TCS might do something like 6%-6.5%. To my mind, however, it's a little difficult to do on a given base of $2 billion and it would be really surprising to compare it with someone like HCL on a quarterly basis.
A lot of people anticipated that TCS would at least maintain margins, if not better the operating profit margin on a QoQ basis. Margins have fallen which is something that we have not seen in TCS for the last about four quarters...
We were building in a decline of a 96 basis points in the EBIT margin primarily because the company continues to hire aggressively and Q4 being a soft quarter you might not see the revenue growth coming in.
That might lead to a decline in the utilisation and that was primarily the reason we were building close to 100 basis points decline in the EBIT margin.
How are you working your numbers for FY12? What is the assumption that you are working on, given TCS' consistent outperformance in the market space?
It will take some for us to come out with the numbers.
What about the exposure, almost 21% to the euro and the pound? How would the forex positions be managed by TCS given an environment where there is a lot of volatility on the currency front?
In the last couple of quarters they have been able to do that much better than most of the other peers. It has been consistent that if the rupee stays in the band of around 44 to 47, currency volatility is manageable.
However, if we have a significant appreciation in any quarter then, it definitely impacts your operating margin, which is not manageable on a quarterly basis.
How do you think the year as a whole would pan out for TCS, purely in terms of the operating picture? If at all there could be a culprit as far as the margin goes, it has to be the utilisation rate...
If you continue to hire 50000 people on an annual basis, your utilisations might come off a bit. On a margin front, I expect them to at least maintain them at the current level.
On the hiring numbers we are expecting guidance to be more than 50,000. How would any surprise there impact your outlook? Are you expecting a surprise firstly and secondly how would that tweak the numbers or the general outlook on how the company would manage to employee cost and thereby its margins?
The company has been saying 45000 gross for FY12, if I am not wrong. What we have to look at is TCS seems to comprehend that it cannot hire 50000 gross heads annually every year and that is why it is trying to diversify by going into something like that iON platform which kind of is a non-linear revenue.
So I have to look at if and when they decide to guide for 50,000 plus, then I would be interested in knowing what is the attrition number that they are looking at for FY12 because a significant jump in the hiring would suggest that demand is still strong and given that they are pursuing a lot of non-linear initiatives, it might suggest that they expect that the attrition to pick up as well.
A disappointment there on the quarter on quarter numbers front, but it has still significantly done well for themselves at least on the FY11 numbers. What was your outlook when you first saw the initial numbers?
See the initial reaction to numbers is that it is a good set of numbers. They are ahead of our estimates at least and a 5.1% revenue growth is decent considering that Q1 of calendar is typically a seasonally slow quarter.
So decision-making takes time and the spending is not as robust as you might change some of the other quarters. Prima-facie, I would say it is a good set of numbers. That is what my initial reaction would be.
Do you think there would be a bit of a disappointment coming in which is reflecting in the stock reaction of the bonus issue not being announced this time around?
Those expectations are always difficult to fulfill at all the times, but yes what is leading to the decline in the stock price is primarily a high level of expectations from the stock on every quarter.
And when the consensus is very high relative to what the firm is saying, then you might see people saying that it is a disappointment but considering that this is a seasonally weak quarter, I would say it is a good set of numbers.
What is your sense there is of course focus going to be on their hiring guidance going forward? In terms of what they do from an FY12 perspective is also going to be key because like you pointed out this has really been an outperformer of sorts quarter on quarter even in terms of stock price movements. Do you think TCS would perhaps give a better indication about things in FY12, particularly on the hiring front?
Yes, it is. A lot of people would be keen to hear what Chandra says because in the last four or five quarters their commentary has led to the precedence in the movement in the IT sector.
In terms of hiring targets this year, they will likely hire around 50,000 gross additions which is a very steep number and what they hire next year and how are they going to do on their utilisation front and a couple of other matrix would be your keen thing to watch look out for.
What would you do with TCS at 1200?
TCS continues to be our top pick within the IT space, primarily because it looks in much better shape than some of its other peers. It did its restructuring back in 2008 and it has grown faster than some of the other peers in the last five quarters.
Any decline in the stock price gives you a decent opportunity to enter and we still maintain it as a buy with a price target of around 1280.
Could the disappointment be largely on account of the fact that the expectations after what HCL Tech did were probably high?
It would be largely unfair to compare on a same base because the base for TCS and HCL is different.
A couple of people that we spoke to two days before the results mentioned that expectations from TCS would be high because for the last three quarters they have managed to surprise the street. As I see the Q4 numbers are not really that disappointing...
It is always a case of high expectations set at the start. Most of the streets have expected closer to 5% dollar growth. So 5.1% is probably in line with the expectation.
However, given that HCL showed significant upside to its numbers, people were expecting that TCS might do something like 6%-6.5%. To my mind, however, it's a little difficult to do on a given base of $2 billion and it would be really surprising to compare it with someone like HCL on a quarterly basis.
A lot of people anticipated that TCS would at least maintain margins, if not better the operating profit margin on a QoQ basis. Margins have fallen which is something that we have not seen in TCS for the last about four quarters...
We were building in a decline of a 96 basis points in the EBIT margin primarily because the company continues to hire aggressively and Q4 being a soft quarter you might not see the revenue growth coming in.
That might lead to a decline in the utilisation and that was primarily the reason we were building close to 100 basis points decline in the EBIT margin.
How are you working your numbers for FY12? What is the assumption that you are working on, given TCS' consistent outperformance in the market space?
It will take some for us to come out with the numbers.
What about the exposure, almost 21% to the euro and the pound? How would the forex positions be managed by TCS given an environment where there is a lot of volatility on the currency front?
In the last couple of quarters they have been able to do that much better than most of the other peers. It has been consistent that if the rupee stays in the band of around 44 to 47, currency volatility is manageable.
However, if we have a significant appreciation in any quarter then, it definitely impacts your operating margin, which is not manageable on a quarterly basis.
How do you think the year as a whole would pan out for TCS, purely in terms of the operating picture? If at all there could be a culprit as far as the margin goes, it has to be the utilisation rate...
If you continue to hire 50000 people on an annual basis, your utilisations might come off a bit. On a margin front, I expect them to at least maintain them at the current level.
On the hiring numbers we are expecting guidance to be more than 50,000. How would any surprise there impact your outlook? Are you expecting a surprise firstly and secondly how would that tweak the numbers or the general outlook on how the company would manage to employee cost and thereby its margins?
The company has been saying 45000 gross for FY12, if I am not wrong. What we have to look at is TCS seems to comprehend that it cannot hire 50000 gross heads annually every year and that is why it is trying to diversify by going into something like that iON platform which kind of is a non-linear revenue.
So I have to look at if and when they decide to guide for 50,000 plus, then I would be interested in knowing what is the attrition number that they are looking at for FY12 because a significant jump in the hiring would suggest that demand is still strong and given that they are pursuing a lot of non-linear initiatives, it might suggest that they expect that the attrition to pick up as well.
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