TCS recently reported its Q1FY15 results, which were in line on revenue front & at operating level. However, the net profits were above estimates, aided by higher other income. Buy on dips.

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HDFC sec Scrip code Industry CMP (Rs.) Recommended Action Entry price band (Rs.)* Target (Rs.) Time Horizon
TCSLTDEQNR IT 2586.9 Buy on dips 2300‐2364 2620 1 quarter
*Applicable till the next results are announced
In our results review dated April 22, 2014, we recommended existing investors to hold TCS and advised fresh buying on dips to 2002‐2057 for a price target of Rs. 2327.
Thereafter the stock touched a low of Rs. 2000.5 on May 19, 2014 and subsequently met our price target on June 26, 2014. The stock touched a new high of Rs. 2595 on
July 23, 2014. Currently it is quoting at Rs. 2586.9.
TCS recently reported its Q1FY15 results, which were in line on revenue front & at operating level. However, the net profits were above our estimates, aided by higher
other income. We present an update on the stock.
Key highlights of Q1FY15 results: (IFRS)
Consolidated net revenues for the quarter increased by 22.9% Y‐o‐Y and by 2.6% Q‐o‐Q to Rs. 221.1 bn. USD revenues increased by 5.5% Q‐o‐Q, led by a robust 5.7%
growth in volumes. EBITDA margins improved by 15 bps Y‐o‐Y, but fell by 208 bps Q‐o‐Q to 28.8%. EBIT margins declined by 74 bps Y‐o‐Y & by 285 bps Q‐o‐Q to 26.3%.
Sequential fall in EBIT margins was due to wage hikes (‐219 bps), rupee appreciation (‐73 bps) & higher depreciation (‐80 bps) due to one‐time depreciation charge.
However, higher utilisation & operational efficiencies (positive impact of 87 bps Q‐o‐Q) protected further downside in margins.
However, higher other income (up 84.3% Y‐o‐Y & 16.6% Q‐o‐Q), decline in the effective tax rate (down 11 bps Y‐o‐Y & 28 bps Q‐o‐Q to 23.1%) and decline in minority
interest (down 52.9% Y‐o‐Y & 21.2% Q‐o‐Q) boosted the PAT growth, up 26.9% Y‐o‐Y & down 4.5% Q‐o‐Q (though better than expected).
EPS for the quarter stood at Rs. 25.8 vs. Rs. 20.4 in Q1FY14 & Rs. 27 in Q4FY14.
Quarter Financials: (IFRS)
Particulars (Rs. in Million) Q1FY15 Q1FY14 VAR [%] Q4FY14 VAR [%] Remarks
Revenues 221110 179871 22.9 215511 2.6
• USD revenues increased by 5.5% Q‐o‐Q, led by a robust 5.7% growth in volumes. While the
blended realisations fell by 1%, onsite shift aided the Q‐o‐Q revenue growth by 0.8%. In
Constant currency terms revenues grew by 4.8% Q‐o‐Q.
• Geographically, the growth was broad based driven by North America, UK, India & Asia
Pacific. Amongst the verticals, Media & Entertainment, Life Sciences & Healthcare, Hi‐tech
and Travel & Hospitality were the major growth drivers.
Cost of Revenues 118824 94891 25.2 112171 5.9
Gross Profit 102286 84980 20.4 103340 ‐1.0
SGA Expenses 38616 33448 15.5 36806 4.9 SG&A / Net Sales fell by 113 bps Y‐o‐Y, but rose 39 bps Q‐o‐Q to 17.5%.
EBIDTA 63670 51532 23.6 66534 ‐4.3
Depreciation & Amortisation 5521 2905 90.1 3724 48.3 Sharp Y‐o‐Y & Q‐o‐Q rise in depreciation cost was due to one‐time depreciation charge of Rs.
RETAIL RESEARCH July 23, 2014Tata Consultancy Services Ltd. (TCS) – Q1FY15 Result Update

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1730 mn incurred on assets with ‘NIL’ useful life.
EBIT 58149 48627 19.6 62810 ‐7.4
Other Income, net 8151 4422 84.3 6990 16.6
Other income included forex gains of Rs. 3200 mn in Q1FY15 compared to Rs. 2044.8 mn gains in
Q4FY14.
PBT 66300 53049 25.0 69800 ‐5.0
Provision for Tax 15312 12312 24.4 16313 ‐6.1 Effective tax rate on PBT fell by 11 bps Y‐o‐Y & 28 bps Q‐o‐Q to 23.1%.
PAT 50988 40737 25.2 53487 ‐4.7
Minority Interest 410 870 ‐52.9 520 ‐21.2
Adjusted PAT 50578 39867 26.9 52967 ‐4.5
Net profits were higher than our estimates, boosted by higher other income, decline in the
effective tax rate and decline in minority interest.
Equity 1957.2 1957.2 0.0 1958.7 ‐0.1
EPS 25.8 20.4 26.9 27.0 ‐4.4
FV 1 1 0.0 1 0.0
Cost of Rev. / Net Sales (%) 53.7 52.8 52.0
Gross Profit / Net Sales (%) 46.3 47.2 48.0
SGA Expenses / Net Sales 17.5 18.6 17.1
Tax Rate (%) 23.1 23.2 23.4
EBITDAM (%) 28.80 28.7 30.9
EBITM (%) 26.3 27.0 29.1
Sequential fall in EBIT margins was due to wage hikes (‐219 bps), rupee appreciation (‐73 bps) &
higher depreciation (‐80 bps) due to one‐time depreciation charge. However, higher utilisation &
operational efficiencies (positive impact of 87 bps Q‐o‐Q) protected further downside in margins.
PATM (%) 22.9 22.2 24.6
(Source: Company, HDFC Sec)
Some observations on Q1FY15 results:
• Geographically, the revenue growth (in INR terms) was broad based with North America, UK, India & Asia Pacific being the major growth contributors, up 2.6%, 2.3%,
5.2% & 4.5% Q‐o‐Q respectively. Continental Europe & Latin America grew by 1.8% & 1.4% Q‐o‐Q respectively. However, MEA disappointed, reporting de‐growth of
2% Q‐o‐Q. In June 2014 quarter, TCS posted the highest incremental revenue of $191 mn in the last 15 quarters driven by holistic growth across markets led by North
America.
Geography wise revenue distribution:
Particulars Q1FY14 Q4FY14 Q1FY14
North America 52.2% 52.2% 54.1%
Latin America 2.2% 2.2% 2.4%
UK 17.7% 17.8% 17.0%
Continental Europe 12.0% 12.1% 9.9%

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India 6.3% 6.2% 7.6%
Asia Pacific 7.6% 7.4% 6.9%
MEA 2.0% 2.1% 2.1%
• Addition of clients during the quarter remained healthy and across the board. The Clients in $50 mn+ band increased by 5 Q‐o‐Q, while no of $20 mn+ and $10 mn+
clients increased by 8 & 13 Q‐o‐Q respectively in Q1FY15. The company closed 7 large deal wins during the quarter.
• Employee Metrics
Q1FY15 Q4FY14 Q1FY14 Remarks
Total No of Employees incl. Indian
Subsidiaries
305431 300464 277586
Gross Addition # 15817 18564 10611
Of the total Gross Additions, 3452 were trainees & 8488 were Lateral additions. Overseas employees were
3877. The company has maintained its hiring target of ~55000 in FY15. It extended offers to 25,000 campus
graduates and ~3,000 of them joined in Q1FY15.
Net Addition # 4967 9751 1390
Attrition Rate (IT services) 12.0% 10.4% 10.5% Attrition rate increased by 160 bps Q‐o‐Q & by 150 bps Y‐o‐Y. Still it continues to remain best in industry.
Utilisation Rate:
Including Trainees 79.8% 77.9% 72.5%
Excluding Trainees 85.3% 83.8% 82.7%
Utilization rate improved on both Y‐o‐Y & Q‐o‐Q basis, which was encouraging and at a multi quarter high.
The management stated that it would continue to operate at higher utilization rates considering its large
headcount base.
# Excl. Indian subsidiaries
• The revenue growth (INR) during the quarter was largely driven by Media & Entertainment, Life Sciences & Healthcare, Hi‐tech and Travel & Hospitality which grew by
9.8%, 6.4%, 5.6% & 5.6% Q‐o‐Q respectively. Energy & Utilities, Retail & Distribution and Telecom verticals also grew at a robust pace by 5%, 4.3% & 4% respectively.
However, Manufacturing grew marginally by 2.6%, while revenues from the dominant BFSI business de‐grew by 0.3% Q‐o‐Q. The insurance portion of financial
segments was one weak area as a result of which the segment revenues declined sequentially. However, management expects this segment to start growing again
from September 2014 quarter although FY15 growth would likely lag overall company growth.
Revenue by Industry Vertical (%)
Verticals Q1FY15 Q4FY14 Q1FY14
BFSI 41.7% 42.9% 43.0%
Telecom 9.4% 9.3% 9.6%
Retail & Distribution 13.8% 13.5% 14.0%
Manufacturing 8.6% 8.6% 8.4%
Hi‐Tech 5.5% 5.3% 5.5%

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Life Sciences & Healthcare 6.3% 6.1% 5.5%
Travel & Hospitality 3.6% 3.5% 3.4%
Energy & Utilities 3.9% 3.8% 3.7%
Media & Entertainment 2.7% 2.6% 2.1%
Others 4.5% 4.4% 4.8%
• All the service lines the growth was driven by Infrastructure Services (up 7.2% Q‐o‐Q), Assurance (up 5.9% Q‐o‐Q) & Enterprise Solutions (up 4.1% Q‐o‐Q). ADM also
grew at decent pace of 2% Q‐o‐Q. However, Asset Leverage Solutions, Engineering & Industrial Services and Global consulting disappointed with de‐growth of 3.5%,
2.6% & 2.1% Q‐o‐Q respectively. BPO services grew marginally by 0.3% Q‐o‐Q.
• Revenue by Service Offerings (%)
Service Offerings Q1FY15 Q4FY14 Q1FY13
IT Solutions & Services
Application Development & Maintenance 40.8% 41.0% 42.3%
Enterprise Solutions 15.9% 15.7% 15.1%
Assurance Services 8.6% 8.4% 8.1%
Engineering & Industrial Services 4.5% 4.8% 4.7%
Infrastructure Services 12.6% 12.0% 11.9%
Global Consulting 3.2% 3.4% 3.5%
Asset Leverage Solutions 2.5% 2.6% 2.5%
Business Process Outsourcing 11.9% 12.1% 11.9%
Other highlights
• TCS signed 7 large deals during the quarter, 2 in Retail and one each in Hi‐tech, BFS, Insurance and Life Sciences. It is currently in active discussion in at least 8 large
deals, spread across industries.
• In the digital space, the company has won many orders. For instance, it won an engagement with an American healthcare and insurance company to build big data
platform for enabling 360 degree customer view. Further, the company was selected by a large North American food retail chain to develop digital applications that
provide 'on the go' analytics and enable quicker decision making for store managers. The company was also chosen by a leading global insurance major to develop
customer centric sales applications using digital technologies
• As of June 30, 2014, the company has applied for 1804 patents including 58 applied during the quarter. Till date, the company has been granted 129 patents.
• On the occasion of the 10th anniversary of TCS' IPO TCS announced a special dividend of Rs. 40 per share in addition to interim dividend of Rs. 5 per share. The special
dividend by itself would entail a payout of over Rs. 80 bn for the company or about a third of its current cash balance.

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Conclusion & Recommendation
TCS’s Q1FY15 sequential revenue & operating profit growth was in line, while PAT growth was ahead of our estimates, aided by higher other income. Healthy volume
growth, lower than expected decline in EBIT margins (supported by improvement in utilisation & operational efficiencies), healthy growth across industries and key
markets & optimistic management commentary on IT industry outlook were positive highlights of the quarter. Strong growth witnessed in North America & UK, its key
markets was encouraging.
The company stated that it has a strong demand pipeline in place and its customer‐centric mindset, leadership in the Digital space and strong execution capabilities will
help it sustain momentum. Under‐penetration led growth in Europe and discretionary/digital spending led growth from US would fuel revenue growth. The management
continues to reiterate that the usual phenomenon of H1 being stronger than H2 would hold true in FY15. Among verticals, TCS indicates that apart from good prospects in
Manufacturing, Retail, Hi Tech and Life sciences, it should see very strong growth in BFSI and Telecom in FY15 (company believes both the verticals could go ahead of
company level average). The management is very bullish on Digital business going forward. As per the management, the growth prospects remain rock solid in Europe
both for the sector and for the company as the market continues to become more amenable for offshoring/outsourcing with TCS's early investments in the market
expected to continue driving results.
The company's disciplined stance in operations has helped it mitigate the impact of multiple headwinds like currency movements, accelerated depreciation norms and
wage hikes during the quarter. Looking ahead, the company plans to continue to maintain its EBIT margins in its desired band of 26‐28% by operating efficiently.
While we expect revenue growth of TCS to remain healthy over the next one to two years, wage hikes and continued re‐investment in the business could put pressure on
the margins. While the management has stated that it would continue to operate at higher utilization rates considering its large headcount base, we feel utilisation is
near to peak levels and hence offers limited scope for improvement. We expect the margins in FY15 to be lower than that reported in FY14. However, the operational
efficiencies would limit the downside.
We feel TCS is on track to achieve our FY15 revenue & operating profit projections. Hence we are keeping the same unchanged. However, we feel the company could
surpass our PAT estimates. Hence we are enhancing the same by 3.1%. Accordingly revised EPS for FY15 is estimated at Rs. 111.6 (vs Rs. 108.2 originally estimated). We
have incorporated FY16 projections, wherein we expect TCS’s net sales, operating profit & PAT to grow by 16%, 14.1% & 14.5% respectively. EPS is projected at Rs. 127.8.
At CMP, the stock trades at 20.2x FY16E EPS, which is at a premium to its nearest peers Infosys & Wipro. We expect premium valuations of TCS to sustain, considering its
past superior execution track record, better visibility in terms of resource planning given its lowest attrition level in the industry.
Valuing the stock at 20.5xFY16E EPS, we arrive at a price target of Rs. 2620. The stock offers limited upside from current levels. Hence, for better returns and margin of
safety, we advise investors to buy it only on dips to Rs. 2300‐2364 (18‐18.5xFY15E EPS) for our price target over the next quarter.

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Financial Estimates: (IFRS)
Particulars (Rs. in Millions) FY12 FY13 FY14 FY15 (OE)* FY15 (RE)* FY16 (E)
Net Revenue 488938 629895 818094 942287 942287 1093053
EBIDTA 144176 180872 251323 281744 281744 321358
Adjusted PAT 106382 139060 191168 212015 218611 250309
EPS (Rs.) 54.4 71.1 97.6 108.2 111.6 127.8
OPM (%) 29.5 28.7 30.7 29.9 29.9 29.4
PATM (%) 21.8 22.1 23.4 22.5 23.2 22.9
PE 47.6 36.4 26.5 23.9 23.2 20.2
*OE = Original Estimates; RE = Revised Estimates (Source: Company, HDFC Sec Estimates)
Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
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