EQUITY RESEARCH TCS

MACRO ECONOMIC FACTORS

RUPEE DEPRECIATION
The depreciation in rupee is boosted software sales and forex gains Experts suggest that one per cent depreciation in the rupee has a positive impact of about 2540 basis points on the margins of IT companies. With a depreciating rupee, the value of exports would naturally increase. In 2011-12 IT industry made the Highest net forex earnings $14,483 millions

CLOUD COMPUTING
Market in India is likely to grow from $900 to $3-4 billion in 2015.About 60% of enterprise workload will be on cloud in 5 years. 25% Of the Indian Market in India is Private Cloud The Global Size of Public cloud (SAAS,PAAS& IAAS ) is expected to grow by $160 billion by 2020

VISA
Indian IT majors and other companies are increasingly facing problems relating to the L1 and B1/B2 visas needed to carry out business in the US. The H1B visa category, which is also used in large numbers by Indian IT companies,. H1B is also expensive and comes with lots of administrative constraints, multiple levels of US government scrutiny and compliance requirements. "The B1 in lieu of H1B category is among the most difficult and has been under attack in the US Congress with talk of it being revoked altogether.

ATTRITION
The IT industry witnessed an average attrition of 17-25 per cent in FY12 while the average attrition across sectors-manufacturing, banking and others-was at about eight per cent. The software industry clocked one of its highest attrition rates in FY11.Attrition, which is defined as employees resigning or retiring and does not include people who were fired, has a direct relation to the growth of the sector and India's GDP. When the industry is expanding, new firms set up shop and hire employees on a higher salary, which leads to resignations

INFRASTRUCTURE
The development of country is dependent on infrastructure. For companies that believe in the long term story of India ,this is a probably a good time as one can get real estate and talent at relatively lower cost. Builders in Hyderabad charge 30- 80 per sq. feet in large IT Parks .

It's highly professionally managed IT consulting and services company under the belt of TATA TCS has been building a full set of SAP life cycle services, from consulting to implementation, managed services, BPO and hosting, while deepening its technical and functional capability. Clients cite TCS's commitment to delivery excellence, flexibility to changing requirements, great teamwork and technical expertise as key strengths.

SWOT ANALSIS

Strengths

Weakness

Made progress in commoditized services, but still lags some peers and multinational rivals in highend consulting offerings. Over dependence on US market Fueling the rapid growth has resulted in TCS relying more on junior, albeit well-trained, resources, which has given rise to clients' perception of inconsistent quality of consultants, skills mismatch and resource ramp-up delays.

SWOT ANALYSIS Opportunities

Entering niche markets Growth of the industry of operations Continuing investments in technology by its clientele, a growing preference for global sourcing and the emergence of newer technologies and business models offer many opportunities for TCS Evolution of non-linear delivery models which could positively impact margins, superior platform offerings (Diligenta, Citigroup Global Services) nearing maturity which could expand the scope for cross-selling

Threats

People-led linear growth means Cognizant can beat it, and there are no visible leaders beyond N Chandrasekaran. That could pose a big challenge. Cheaper technology Exchange rate fluctuation Attrition

FACTORS FOR IT INDUSTRY & TSC

TCS
JAPAN
Japan is a potential large IT market for us, and sales to Japan have been growing in double digits, though lower than what total Indian industry grew. India's top IT firms as well as several smaller ones employ hundreds of people in Japan. From an IT perspective, Japan is the third largest IT market globally. Japan on the other hand has been struggling to recover from the recessionary pressures on its economy, the changing demographic pattern, lack of technical manpower and increasing competitiveness of global markets. The Japanese economy is keenly looking for options that will enable it to re-establish itself as a technology leader. The Japanese IT services market at USD 108 billion is the worlds second largest after the US. However, Japan constitutes less than two per cent of the IT services exports from India. Decoding the second biggest IT services market in the world continues to be a challenge for the Indian IT companies. Indian companies looking to de-risk themselves from dependence on a single market have long tried to establish themselves in this market, but with limited success. According to the industry body, over the next decade, close to 80% of India's IT sector growth is expected to come from the presently untapped sectors and regions. That means, home-grown software vendors TCS, Infosys, Wipro, HCL, Cognizant and others, will have to look beyond the long-established US and European markets and make inroads into regions such as Japan, China and Latin America, which are considered to be the next growth frontiers.

Employment & ISO

Employment , ISO & SUBSIDARY

TCS has been recommended enterprise-wide for ISO 9001:2000, BS 7799-2:2002 and BS 150001:2002 certifications. This is the largest, enterprise-wide multiple certification of an IT solutions organization to date. It is the company`s second enterprise-wide achievement after it became the first company to be assessed enterprise-wide, for CMMI and PCMM.Tata Consultancy Services plans to hire 45,000 in FY13"With business demand continuing to be robust, TCS have made 43,600 offers on campuses for trainees to join us from the second quarter of this fiscal year. Our efforts to increase retention by engaging with our employees and offering them a progressive career path are paying dividends with attrition rates falling further to 12.2 per cent. Diligenta, a subsidiary of TCS, has announced that it has entered the UK BPO life assurance market having secured a USD 486 million deal with Pearl, the Peterborough based closed fund group. Diligenta will provide BPO services over an initial 12-year period for Pearl group in processing and administration.

JAPAN

VALUATION RATIOS TCS AND COMPETITORS & FUTURE PROJECTIONS

VALUATIONS
DCF
Discounted cash flow tries to work out the value of a company today, based on projections of how much money it's going to make in the future. DCF works best when there is a high degree of confidence about future cash flows. DCF analysis says that a company is worth all of the cash that it could make available to investors in the future.
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FCF(1+g)/Ke-g FCF*DF DF 268,420.45 2,338.72 0.87 2,033.67 280,415.59 279,797.56 1,429.58 3,400.04 0.76 2,570.92 3,847.37 4,439.67 4,671.28 0.66 0.57 0.50 2,529.71 2,538.39 2,322.45 2013 EBIT 16,347.10 Tax 4086.774265 PAT 12,260.32 Depreciation 1,027.57 Working Capital changes -3216.0975 Capex 1039.39 FCF 13,409.45 2014 19,225.41 4806.351665 14,419.05 1,408.02 -3376.90238 1165.20 15,222.74 2015 22,609.93 5652.483748 16,957.45 1,915.57 -3545.74749 1291.19 17,296.45 2016 26,589.05 6647.2633 19,941.79 2,589.90 -3723.0349 1409.39 19,665.53 2017 31,266.26 7816.566 23,449.70 3,482.61 -3909.1866 1507.91 22,368.37

WACC

15.00%

PV Of Firm Value of Equity Price Per shares

VALUATION
FCFE

This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. The FCFE is a measure of what a firm can afford to pay out as dividends. Dividends paid are different from the FCFE for a number of reasons Desire for Stability, Future Investment Needs , Tax Factors.
2012 Year_Index Growth pat per share Add: Depr Less: Capex Less: Delta WC FCFE Beta Ke PV of FCFE 0 53.09 4.690017 6.044131 14.97537 36.76 2013 1 19% 62.91598 5.55767 7.162295 11.37796 49.93 0.75 13.3% 2015 2016 CAGR growth 2 3 4 19% 19% 19% 74.55544 88.34819 104.6926 6.585839 7.80422 9.248 8.48732 10.05747 11.91811 13.48289 15.97722 18.93301 59.17 70.12 83.09 0.75 0.75 0.75 13.3% 13.3% 13.3% 2014 2017 5 19% 124.0607 10.95888 14.12296 22.43561 98.46 0.75 18.5% 2019 transition 6 7 15.80% 13.10% 143.6623 162.4821 12.69038 14.35282 16.35438 18.49681 22.70605 21.8004 117.29 136.54 0.73 0.71 13.1% 13.0% 2018 2020 8 10.40% 179.3802 15.84552 20.42048 19.57443 155.23 0.69 12.8% 2021 9 7.70% 193.1925 17.06562 21.99285 15.99984 172.27 0.67 12.7% 2023 stable 10 11 5.00% 5% 202.8521 212.9948 17.9189 18.81485 23.09249 24.24712 11.1895 11.74897 186.49 195.81 0.65 0.65 12.6% 12.6% 2022

44.09129 46.13526 48.27398 50.51185 42.13788 56.00972 58.14478 59.09917 58.78003 57.17397 53.33867

Sum of High Growth Sum of Transition Phase Terminal Value PV of TV P0 Target Price

231.1503 289.2077 2593.556 706.4724 1226.83 1389.385

3 STAGE MODEL T Three-stage model has an initial phase of stable high growth that lasts for a certain period. In the second phase the growth rate declines linearly until it reaches the a final stable growth rate. This model improves upon both previous models and can be applied to nearly all firms.

ke 15.11% 15.11% 15.11% 15.11% 15.11% 15.11%

growth 18 18 18 18 18 18 PV of DPS in HG 14% 14% 8% 8% 8% PV of DPS in Transition Terminal Value PV of TV Intrinsic Value

dps 11.50 13.57 16.01 18.89 22.30 26.31

df 1 0.868766 0.754754 0.655705 0.569654 0.494896

11.5 11.78915 12.08557 12.38945 12.70097 13.02032 73.48546 14.52161 15.09735 23.35414 25.51656 27.8792 106.3689 2600.17 1204.382 1384.236

RELETATIVE VALUATIONS

A business valuation method that compares a firm's value to that of its competitors to determine the firms financial worth. Use of relative valuation models is to determine whether a company's stock is a good buy. When performing a relative valuation, a company's sector should be used to determine the most logical multiple to use.

14.18% 13.26% 12.34% 11.42% 10.50%

31.04 36.63 43.23 51.01 60.19

0.47 0.41 0.54 0.50 0.46

DIvidends Based Model

Net Income Book Value Of Equity Dividend Earnings Per Share Pay Out Ratio Retention Ratio Growth Rate Return On Equity Dividends Per Share Growth Rate Payout Ratio

5,059.64 295.72 489.31 51.35 9.67% 90.33% 14.86% 16.45% 30.00

5311.12 295.72 489.31 53.65 9.21% 90.79% 11.23% 12.37% 45.00

7092.66 295.72 2,740.11 35.69 38.63% 61.37% 8.57% 13.97% 50.00

9189.79 295.72 1,565.78 46.28 17.04% 82.96% 12.70% 15.30% 55.00

10,523.45 295.72 3,131.55 53.09 29.76% 70.24% 10.41% 14.82% 60.00

A procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. The principal behind the model is the net present value of the cash flows. To get a growth number, one option is to take the return on equity (ROE) and multiply it by the retention ratio (which is 1-the payout ratio).

1.148599478 1.112268763 1.085720499 1.126971576 1.104079428 1.096708461 1.092129344 1.386330375 1.170382566 1.297578266

Projections Mar'13 Mar'14 Mar'15 Mar'16 Mar'17 EPS 62.64 73.64 86.55 101.83 119.70 Payout Ratio 20.32% 20.32% 20.32% 20.32% 20.32% Estimated Dividends 30.00 45.00 50.00 55.00 60.00 Cost Of Equity 12.84% 11.84% 11.34% 10.84% 10.34% Present Value 26.58631691 35.9764409 36.2256639 36.4398534 36.6848166

Terminal Value PV of TV

2075.037248 1306.167588

What the TECHNICAL Indicates ?

RSI Indicator Chart
80 RSI values 60 40 20 RSI Value Upper Range Lower Range

0 11/18/2010

2/26/2011

6/6/2011

9/14/2011

12/23/2011 Dates

4/1/2012

7/10/2012

10/18/2012

1/26/2013

1500.00 1400.00 1300.00 1200.00 1100.00 1000.00 900.00 800.00

Bollinger Bands

Price(Ratio) Upper Band Middle Band Lower Band

Range Bound : 1447 - 1232

Current MPS : 1296

Estimated Target : 1367