- TCS recently reported Q4FY15 results that were marginally below estimates for revenue and operating levels, but net profit growth was above estimates due to higher other income. - Revenue growth was impacted by cross-currency headwinds and weakness in telecom and energy verticals. However, constant currency growth was decent. - Margins improved sequentially despite currency headwinds due to cost optimization and higher offshore revenue. - The analyst maintains a positive outlook and recommends buying on dips, expecting better discretionary spending and growth in FY16.

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HDFC sec Scrip code Industry CMP (Rs.) Recommended Action Entry band (Rs.)* Target (Rs.) Time Horizon
TCSLTDEQNR IT 2500.3 Buy on dips 2266-2337 2549 1 quarter
*Applicable till the next results are announced
In our results review dated Jan 23, 2015, we recommended investors to buy TCS at the then CMP of Rs. 2514 and add on dips to 2266-2329 for a price target of Rs. 2643
over the next quarter. Thereafter the stock touched a low of Rs. 2436 on Feb 10, 2015 and subsequently met our price target on Feb 19, 2015. The stock touched a high of
Rs. 2810 on March 04, 2015. Currently it is quoting at Rs. 2500.3.
TCS recently reported its Q4FY15 results, which were marginally below our estimates on the revenue front and at the operating level (even after excluding the impact of
one time employee bonus paid). However, net profit growth was above our estimates, aided by higher other income. We present an update on the stock.
Key highlights of Q4FY15 results: (IFRS)
 Consolidated net revenues for the quarter increased by 12.4% Y-o-Y and declined by 1.1% Q-o-Q to Rs. 242.2 bn. USD revenues declined by 0.8% Q-o-Q at USD 3900
mn, impacted by cross currency headwinds and weakness in telecom and energy verticals. Growth in constant currency (CC) stood at 2.7% Q-o-Q. Blended volume
growth (in CC) was 1.4% Q-o-Q, while realizations (in CC) improved by 0.8% Q-o-Q. Revenue miss, even after lowering estimates in mid-quarter update, was attributed
to 6.2% and 4.7% CC decline in revenues from volatility in telecom and cutback in spending in energy and utilities verticals.
 EBITDA margins (after excluding the impact of one-time bonus for employees - one week's salary for every completed year of service - to mark 10 years of listing) fell
by 170 bps Y-o-Y, but improved by 38 bps Q-o-Q to 29.2%. EBIT margins declined by 193 bps Y-o-Y, but improved by 18 bps Q-o-Q to 27%. Sequential margin expansion
despite cross currency headwinds was aided by SG&A rationalization, improvement in realization and higher offshoring.
 Reported PAT declined by 27.3% Y-o-Y & 29.4% Q-o-Q, impacted by one-time special bonus to eligible employees, which amounted to Rs. 26279 mn. Excluding this
impact, the adjusted PAT grew by 11.5% Y-o-Y and 8.5% Q-o-Q, led by higher other income (up 61.5% Y-o-Y & 79.4% Q-o-Q, led by higher forex gains). Depreciation
was up by 27.3% Y-o-Y & 10.5% Q-o-Q, while effective tax rate increased by 23 bps Y-o-Y but declined by 46 bps Q-o-Q to 23.6%. PAT margins fell by 19 bps Y-o-Y, but
rose 216 bps Q-o-Q to 24.4%.
 EPS for the quarter stood at Rs. 30.2 vs. Rs. 27.1 in Q4FY14 & Rs. 27.8 in Q3FY15.
Quarter Financials: (IFRS)
(Rs. In Million)
Particulars Q4FY15 Q4FY14 VAR [%] Q3FY15 VAR [%} Remarks
Revenues 242198 215511 12.4 245011 -1.1
 USD revenues declined by 0.8% Q-o-Q at USD 3900 mn, impacted by cross currency
headwinds and weakness in telecom and energy verticals. Growth in constant currency
(CC) stood at 2.7% Q-o-Q.
 Blended volume growth (in CC) was 1.4% Q-o-Q, while realizations (in CC) improved by
0.8% Q-o-Q.
Cost of Revenues 151760 112171 35.3 132161 14.8 Cost of revenues / Net Sales rose by 1061 bps Y-o-Y and 872 bps Q-o-Q to 62.7%, impacted
RETAIL RESEARCH April 28, 2015Tata Consultancy Services Ltd. (TCS) – Q4FY15 Result Update

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by one time special bonus to eligible employees
Gross Profit 90438 103340 -12.5 112850 -19.9
SGA Expenses 46064 36806 25.2 42319 8.8 SG&A / Net Sales rose 194 bps Y-o-Y & by 175 bps Q-o-Q to 19%.
EBIDTA 44374 66534 -33.3 70531 -37.1
Sharp fall in the reported EBITDA was due to of one-time bonus for eligible employees
amounting to Rs. 26279 mn during the quarter.
EBITDA (Adjusted) 70653 66534 6.2 70531 0.2
Depreciation & Amortization 4742 3724 27.3 4290 10.5
EBIT 39632 62810 -36.9 66241 -40.2
Other Income, net 11291 6990 61.5 6295 79.4
Sharp rise in the other income was aided by higher forex gain of Rs. 6629 mn compared to
Rs. 2415 mn in Q3FY15 & gain of Rs. 2044.8 mn in Q4FY14
PBT 50923 69800 -27.0 72536 -29.8
Provision for Tax 12018 16313 -26.3 17453 -31.1 Effective tax rate on PBT rose 23 bps Y-o-Y but declined by 46 bps Q-o-Q to 23.6%.
PAT 38905 53487 -27.3 55083 -29.4
Minority Interest 323 520 -37.9 642 -49.7
Reported PAT 38582 52967 -27.2 54441 -29.1 Reported PAT was impacted by one-time bonus to eligible employees
Extra ord. items (one-time bonus
to eligible employees)
20477 0 - 0 -
Adjusted PAT 59059 52967 11.5 54441 8.5 Adjusted PAT was higher, aided by sharp rise in the other income.
Equity 1957.2 1957.2 0.0 1957.2 0.0
EPS 30.2 27.1 11.5 27.8 8.5
FV 1 1 0.0 1 0.0
Cost of Revenues / Net Sales (%) 62.7 52.0 53.9
Gross Profit / Net Sales (%) 37.3 48.0 46.1
SGA Expenses / Net Sales 19.02 17.08 17.27
Tax Rate (%) 23.6 23.4 24.1
EBITDAM (%) (Adjusted) 29.17 30.87 28.79
EBITM (%) (Adjusted) 27.21 29.14 27.04
Sequential margin expansion despite cross currency headwinds was aided by SG&A
rationalization, improvement in realization and higher offshoring.
PATM (%) 24.38 24.58 22.22
(Source: Company, HDFC Sec)
Some observations on Q4FY15 results:
 Geographically, the revenue growth (in INR) was impacted by de-growth across geographies like Americas (North America de-grew by 0.3% Q-o-Q, while Latin America
de-grew by 0.6% Q-o-Q), Europe (Continental Europe & UK fell by 5.8% & 2.1% Q-o-Q respectively). India (down 0.1% Q-o-Q) & Asia Pacific (down 0.8% Q-o-Q).
However, MEA grew by 4.9% Q-o-Q. UK business was affected by softness in Diligenta and cross-currency headwinds. Growth in US was subdued, impacted by
weakness in telecom vertical. In CC terms, North America grew near to 1% Q-o-Q, UK grew by 2.4%, Europe grew by 2.5% Q-o-Q, Middle East, Africa, and APAC grew
by 6.4% and 4.2%, respectively.

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 Geography wise revenue distribution:
Particulars Q4FY15 Q3FY15 Q4FY14
North America 52.4% 51.9% 52.2%
Latin America 2.1% 2.1% 2.2%
UK 15.9% 16.1% 17.8%
Continental Europe 11.1% 11.7% 12.1%
India 6.6% 6.5% 6.2%
Asia Pacific 9.8% 9.7% 7.4%
MEA 2.1% 2.0% 2.1%
 In terms of client mining, clients in $100M+ revenue band increased by 4 (which was impressive), in $50M+ revenue band by 3 and in $20M+ revenue band by 3.
Employee Metrics
Q4FY15 Q3FY15 Q4FY14 Remarks
Total No of Employees incl. Indian
Subsidiaries
319656 318625 290713
Gross Addition # 14395 16561 14663
Of the total Gross Additions, 5569 were trainees & 5853 were Lateral additions. Overseas employees were
2973. The company is targeting 50000 gross addition, 16000 campus hires & 35000 campus offers for FY16.
Net Addition # 1031 4868 5463 Net addition was disappointing
Attrition Rate (IT services) 13.8% 13.4% 10.3% Attrition rate increased by 40 bps Q-o-Q & by 350 bps Y-o-Y. Increasing attrition is an area of concern.
Utilisation Rate:
Including Trainees 81.5% 82.1% 77.5%
Strong trainee additions would have possibly resulted in lower utilization levels (including trainees) on Q-o-Q
basis
Excluding Trainees 85.4% 86.7% 84.3% Utilization rates (excluding trainees) fell by 130 bps Q-o-Q, but increased by 110 bps Y-o-Y.
# Excl. Indian subsidiaries
 Vertically, the revenue growth (INR) during the quarter was largely driven by Life Sciences & Healthcare, Manufacturing, Retail & Distribution & Hi-Tech (up 1.9%,
0.7%, 0.5% & 0.1% Q-o-Q respectively). Telecom, Energy & Utilities and Travel & Hospitality underperformed the most, falling by 10.2%, 8.9% & 4% respectively. The
key BFSI vertical de-grew marginally by 0.9% Q-o-Q, while Media & Entertainment de-grew by 0.7%. As per the management, spending in energy, utility and telecom
vertical will continue to be subdued. However, it expects BFSI to see better growth in FY16 as compared with FY15. It also expects traction in Manufacturing, Retail,
Life Sciences to continue. BFSI grew 2% in constant currency (CC) while life-sciences & healthcare, manufacturing and retail reported CC growth of 3%.

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 Revenue by Industry Vertical (%)
Verticals Q4FY15 Q3FY15 Q4FY14
BFSI 40.6% 40.5% 42.9%
Telecom 8.1% 8.9% 9.3%
Retail & Distribution 13.6% 13.4% 13.5%
Manufacturing 10.2% 10.1% 8.6%
Hi-Tech 6.0% 5.9% 5.3%
Life Sciences & Healthcare 6.7% 6.4% 6.1%
Travel & Hospitality 3.4% 3.5% 3.5%
Energy & Utilities 3.9% 4.2% 3.8%
Media & Entertainment 2.7% 2.7% 2.6%
Others 4.8% 4.4% 4.4%
 Among the service lines the revenue growth (in INR) was impacted by Global Consulting & Asset Leverage solutions (down 12.1% & 8.6% Q-o-Q respectively). Among
the other services, Assurance Services, Business Process services & Enterprise Solutions also underperformed, de-growing by 2.4%, 1.8% & 1.3% respectively.
Engineering & Industrial services fell by 1.1%. However, ADM & Infrastructure services grew by 0.5% & 0.2% respectively.
 Revenue by Service Offerings (%)
Service Offerings Q4FY15 Q3FY15 Q4FY14
IT Solutions & Services
Application Development & Maintenance 39.5% 39.5% 41.0%
Enterprise Solutions 15.4% 15.4% 15.7%
Assurance Services 8.5% 8.5% 8.4%
Engineering & Industrial Services 4.5% 4.5% 4.8%
Infrastructure Services 14.3% 14.3% 12.0%
Global Consulting 3.7% 3.7% 3.4%
Asset Leverage Solutions 2.4% 2.4% 2.6%
Business Process Outsourcing 11.7% 11.7% 12.1%
Other Highlights
 TCS announced 9 large deal wins during the quarter which include 4 in financial services, 2 in retail and 1 each in Telecom and Media.
 The Board of Directors at its meeting held on April 16, 2015, has declared a final dividend of Rs. 24 per equity share. With this the total dividend was Rs. 79 per share.
Dividend pay-out ratio stood at 82%.
 On March 08, 2015, the company subscribed to 100% share capital of TCS Foundation, a not-for-profit initiative registered under Section 8 of the Companies Act, 2013
with a paid-up capital of Rs. 1 cr. This company aims at promoting projects and/or programs relating to Corporate Social Responsibility.

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 The cash and cash equivalents for the quarter stood at Rs. 23,211 cr vs. Rs. 23,769 cr in the previous quarter.
 The company also announced a healthy wage increase of 6-10% offshore (8% average) and 2% onshore.
Conclusion & Recommendation
TCS recently reported its Q4FY15 results, which were marginally below our estimates on the revenue front and at the operating level (even after excluding the impact of
one time employee bonus paid). However, net profit growth was above our estimates, aided by higher other income. The revenue growth was impacted by cross currency
headwinds and weakness in telecom and energy verticals. However, growth in constant currency (CC) was decent. Volume growth of 1.4% Q-o-Q was not encouraging.
Cross currency movements in the company's key markets such as the US, UK and Europe reduced as much as 190-200 basis points off dollar-denominated growth. The
sequential margin improvement (though marginal – after excluding impact of one-time bonus) despite cross currency headwinds, aided by SG&A rationalization,
improvement in realization and higher offshoring, was encouraging. PAT growth was higher largely due to higher other income (aided by higher forex gains).
The company is witnessing tough times as it enters FY16 compounded by the cross currency headwinds. However the management remains confident of having a good
growth year in FY16. It feels that the underlying business momentum remains decent. It expects slight increase in IT spending in constant currency terms in CY15 with
allocations for spending on Digital initiatives expected to increase as well as higher discretionary spending across several verticals barring Energy & Utilities and Telecom.
Amongst verticals, BFSI is expected to do better in FY16 as compared to FY15. BFS will grow in line with or above company average. Weakness in the Insurance services
business excluding Diligenta has now bottomed. However weakness in Diligenta is expected to continue for couple of quarters. The management expects traction in
Manufacturing, Retail, Life Sciences to continue. On an overall basis, it expects better discretionary spending in FY16 compared to FY15. Its investments in Platforms,
Digital and Automation are gaining traction with clients.
Overall the deal pipeline remains strong. It has signed about 7 large deals across 7 sectors, which is encouraging. It hopes to maintain EBIT margins in the range of 26-28%
with available levers like increased automation, higher non-linear revenues and other initiatives to improve operational efficiencies.
Industry lobby Nasscom has factored in weaker technology budgets and cut its software exports growth forecast from last year to 12-14% for this financial year. Further,
worldwide IT spending is also expected to shrink by 1.3%, according to technology researcher Gartner. This, along with subdued Q4FY14 reported by TCS makes us feel
that TCS could fall short of our revenue & profit projections for FY16. TCS could grow in line or faster than industry, but it may not have the same lead as it had in the last
three years. FY16 could be an acid test for profitability since unlike earlier years TCS will not have the benefit of Rupee tailwinds. Hence we are downgrading our net
sales, operating profit & PAT estimates by 3.3%, 3.9% & 2.8% respectively. Accordingly, revised EPS for FY16 would stand at Rs. 122.3. We have incorporated projections
for FY17, wherein we expect the net sales, operating profit & PAT to grow by 14%, 13.6% & 15.8% respectively. EPS for FY17 is estimated at Rs. 141.6.
At CMP, the stock trades at 17.7xFY17E EPS, which is at a premium to Infosys & Wipro. TCS has quoted at a premium to its peers considering its past superior execution
track record, better visibility in terms of resource planning given its lowest attrition level in the industry. However, the company has not impressed the street in the last
three quarters. TCS will have to deliver impressive numbers in remaining two quarters, or else the premium could narrow going forward.
We are reducing our price target from Rs. 2643 to Rs. 2549 (valuing the stock at 18xFY17E EPS). We feel investors can buy the stock on dips to Rs. 2266-2337 (16-
16.5xFY17E EPS) for our price target over the next quarter.

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Financial Estimates: (IFRS)
Particulars (Rs. in Mn) FY12 FY13 FY14 FY15 (E) FY15 (Act) FY16 (OE) FY16 (RE) FY17E
Net Revenue 488938 629895 818094 957170 946484 1105531 1069527 1219261
EBIDTA (Adjusted for one time employee bonus) 144176 180872 251323 274708 272943 316182 303746 345051
Adjusted PAT 106382 139060 191168 213449 216961 246533 239574 277382
Equity (FD) 1957 1957 1959 1959 1959 1959 1959 1959
FV 1 1 1 1 1 1 1 1
EPS (Rs.) 54.4 71.1 97.6 109.0 110.8 125.9 122.3 141.6
OPM (%) 29.5 28.7 30.7 28.7 28.8 28.6 28.4 28.3
PATM (%) 21.8 22.1 23.4 22.3 22.9 22.3 22.4 22.8
CMP 2426.9 2426.9 2426.9 2426.9 2426.9 2426.9 2426.9 2426.9
PE 46.0 35.2 25.6 22.9 21.6 19.9 20.4 17.7
*Act = Actual; OE – Original Estimates; RE – Revised Estimates (Source: Company, HDFC Sec Estimates)
Fundamental Research Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: mehernosh.panthaki@hdfcsec.com
RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax:
(022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
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