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TCS: Forex losses spoil strong operating performance - Views on News from Equitymaster

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  • Jan 15, 2009 - TCS: Forex losses spoil strong operating performance

TCS: Forex losses spoil strong operating performance

Jan 15, 2009

Performance summary
  • Net sales grow by 5% QoQ in 3QFY09, chiefly led by higher volumes and billing rates come under pressures.
  • Operating margins expand by 0.5% QoQ during the quarter, largely on account of greater share of offshore revenues.
  • Profit after tax expands by 7% QoQ during the quarter. Growth during the first nine months period stands at a marginal 4% YoY. Forex losses impact bottomline growth for both the periods under consideration.
  • Adds 41 new clients and 8,692 employees during the quarter. Attrition rate stands at 11.9%.
  • Declares interim dividend of Rs 3 per share (dividend yield of 0.6%).


Consolidated financial snapshot
(Rs m) 2QFY09 3QFY09 Change 9MFY08 9MFY09 Change
Sales 69,534 72,770 4.7% 165,695 206,411 24.6%
Expenditure 51,332 53,334 3.9% 123,795 153,183 23.7%
Operating profit (EBITDA) 18,202 19,437 6.8% 41,900 53,229 27.0%
Operating profit margin (%) 26.2% 26.7%   25.3% 25.8%  
Other income (1,689) (1,720)   5,983 (2,970)  
Depreciation 1,399 1,472 5.2% 4,040 3,992 -1.2%
Interest 58 103 79.3% 231 230 -0.6%
Profit before tax 15,057 16,142 7.2% 43,612 46,036 5.6%
Tax 2,204 2,401 8.9% 5,588 6,449 15.4%
Minority interest 136 120 -11.9% 221 344 55.5%
Share of profit of associates 7 1   (9) 6  
Profit after tax/(loss) 12,710 13,621 7.2% 37,812 39,237 3.8%
Net profit margin (%) 18.3% 18.7%   22.8% 19.0%  
No. of shares (m)       978.6 978.5  
Diluted earnings per share (Rs)*         52.8  
P/E ratio (x)*         9.7  
* Trailing 12 months basis

What has driven performance in 3QFY09?
  • TCS grew its topline by 5% QoQ during 3QFY09. This was mainly aided by a 2.4% QoQ increase in volumes. Despite the ongoing financial turmoil, TCS’ ‘banking and financial service and insurance’ segment remained the major revenue driver. This segment (contributes 44% of total revenue) grew by 10% QoQ during the quarter. Other segments which have shown decent growth are telecom, hi-tech and pharma. These grew by 10%, 11% and 16% QoQ respectively. However, manufacturing and retail segments witnessed decline in revenue of 13% and 16% QoQ respectively.


    As regards service offerings, TCS’ ‘business intelligence’ service recorded a growth of 17% QoQ during 3QFY09. Enterprise solution, consulting and application development & maintenance witnessed growth of 11%, 34% and 2% QoQ respectively.


    The company added a net of 8,692 employees during the quarter. The total employee base now stands at around 130,300 and attrition rate stood at 11.9%.

  • TCS’ operating margins expanded by 0.5% QoQ during 3QFY09. A higher share of revenues from offshore services (43.6% as against 42.8% in 2QFY09) aided margins during the quarter. The improvement would have been better but for a reduced utilisation (71.8% including trainees as against 74.7% in 2QFY09). Interestingly, TCS’ utilisation has declined even as most other IT companies are talking of increasing the same to tide over the pressure in operating profitability.

  • TCS reported a 7% QoQ decline in net profits during 3QFY09. This was mainly on account of forex losses that the company incurred on the back of rupee’s volatile movement against the US dollar and the British pound. Excluding these forex adjustments (losses in both 2QFY09 and 3QFY09), the net profits for the quarter have grown by 5% QoQ. This way, net profits for 9mFY09 are up 35% YoY.

What to expect?
At the current price of Rs 507, the stock is trading at a multiple of 7.8 times our estimated FY11 earnings. Given the forex losses that the company has incurred during 3QFY09 and 9mFY09, we would have to marginally revise our profit estimates for FY09 downwards. The company, however, is in line for meeting our revenue estimates for the full year. In its conference call yesterday, the management indicated that it is viewing the current environment with caution. However, it remains confident on business from a long-term perspective. The management sees growth on account of healthy pipeline the company has at present. As a matter of fact, TCS inked six large deals during the quarter. What is now important is how these deals ramp up going forward. We maintain our positive view on the stock from a 2 to 3 years perspective.

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