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TCS: Yet another excellent performance - Views on News from Equitymaster

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TCS: Yet another excellent performance
Jan 15, 2010

Performance summary
  • Net sales grow by 3% QoQ in 3QFY10, 8% YoY during 9MFY10. Growth primarily led by manufacturing and telecom sectors.
  • Operating margins expand by 1.2% QoQ during the quarter, largely on account of better utilization, and cost containment.
  • Aided by better margins and higher other income, net profit rises by 11% QoQ during the quarter. Profit growth for 9MFY10 stands at a robust 27% YoY.
  • Adds 32 new clients and 7,692 employees (net) during the quarter. Attrition rate stands at 11.5% at the end of 3QFY10 (as against 11.4% at the end of previous quarter).
  • Declares interim dividend of Rs 2 per share.

(Rs m) 2QFY10 3QFY10 Change 9MFY09 9MFY10 Change
Sales 74,352 76,485 2.9% 206,411 222,908 8.0%
Expenditure 53,173 53,758 1.1% 153,183 159,353 4.0%
Operating profit (EBITDA) 21,180 22,727 7.3% 53,229 63,555 19.4%
Operating profit margin (%) 28.5% 29.7%   25.8% 28.5%  
Other income (86) 655   (2,970) 824  
Depreciation 1,660 1,679 1.2% 3,992 4,919 23.2%
Interest 35 37 3.7% 230 109 -52.6%
Profit before tax 19,399 21,667 11.7% 46,036 59,351 28.9%
Tax 2,773 3,225 16.3% 6,449 8,771 36.0%
Minority interest 204 203 -0.6% 344 578 67.8%
Share of profit of associates - -   6 2 -64.1%
Profit after tax/(loss) 16,422 18,239 11.1% 39,237 50,001 27.4%
Net profit margin (%) 22.1% 23.8%   19.0% 22.4%  
No. of shares (m)       978.6 1,957.5  
Diluted earnings per share (Rs)*         32.4  
P/E ratio (x)*         24.5  
* Trailing 12 months basis

What has driven performance in 3QFY10?
  • TCS grew its topline by 3% QoQ during 3QFY10. This was largely aided by a 6.6% QoQ increase in volumes. The major growth driver was the banking and financial services (BFS) segment, which contributed to around 45% to TCS' consolidated revenues. The company saw some traction in the telecom, retail and Hi-Tech segments as well. Considerable growth came from the energy and utilities segment (3.4% of the topline), telecom and retail sectors. However, performance remained muted for the manufacturing and media segments which contributed around 8% and 2% respectively to the company's topline.

    As for service offerings, TCS' 'global consulting' and 'Enterprise solutions' services recorded a growth of 35% QoQ and 5% QoQ respectively during 3QFY10. This renewed traction witnessed by its high-end IT services suggests a pick-up in discretionary IT spending. The low-end IT services like application development & maintenance and assurance services managed to register sequential growth. However, the performance of company’s BPO operations remain muted.

    In terms of client geography, the US which is the major market (52.5% of the topline) for the company continued to drive growth for the company. The company's particular focus on India, Asia Pacific and Middle East regions has fructified in form of increased revenue from these geographies. The company added a net of 7,692 employees during the quarter. The total employee base now stands at around 149,654. The attrition rate stood at 11.5%.

    Revenue Breakup
    (In Rs m) 2QFY10 3QFY10 Change
    On the basis of industry verticals      
    BFSI 33,459 34,418 3%
    Telecom 8,922 9,255 4%
    Manufacturing 6,469 6,348 -2%
    Retail 8,922 9,178 3%
    Hi-Tech 3,569 3,824 7%
    Healthcare 4,461 4,513 1%
    Transportation 2,602 2,601 0%
    Energy & Utilities 2,082 2,601 25%
    Media & Entertainment 1,636 1,606 -2%
    Others 2,231 2,142 -4%
    On the basis of service offerings      
    ADM 36,879 37,554 1.8%
    Business Intelligence 4,238 4,360 2.9%
    Enterprise Solutions 7,658 8,031 4.9%
    Assurance Services 3,569 3,901 9.3%
    Engg. & Industrial Services 3,718 3,748 0.8%
    Infrastructure Services 5,948 6,042 1.6%
    Global Consulting 1,190 1,606 35.0%
    Asset Leverage Solutions 2,379 2,448 2.9%
    BPO 8,774 8,796 0.3%
    On the basis of geography      
    North America 39,704 40,155 1.1%
    Ibero America 3,718 3,748 0.8%
    UK 12,268 12,238 -0.2%
    Continental Europe 7,881 7,954 0.9%
    India 5,428 6,501 19.8%
    Asia Pacific 3,941 4,283 8.7%
    MEA 1,413 1,606 13.7%
    Source:Company

  • TCS’ operating margins expanded by 1.2% QoQ during 3QFY10. A higher utilisation level of 77.2% (including trainees) coupled with higher offshore volumes aided margins during the quarter. This performance is particularly good in view of the highly volatile currency environment. Pricing remained stable for the company.

  • TCS reported an 11% QoQ growth in net profits during 3QFY10. A strong operating performance coupled with an increased other income are reasons for the same.

What to expect?

At the current price of Rs 794, the stock is trading at a multiple of 19 times our estimated FY12 earnings. TCS has yet again delivered an industry leading performance in terms of topline as well as margins. The most spectacular part of the performance is that the growth has come across the board i.e. across all industry segments and geographies. The company won several large deals including deals from the governments in the UK and India in recent times. During the conference call, the management seemed to be very upbeat about the company’s exemplary performance. It believes that the strategy of investing ahead-of-time in the emerging markets, multiple industries and client relationships has paid well in strengthening the company for the recovery. However, it suggests that the air of uncertainty remains about clients' IT budgets as well as exchange rate. Nevertheless, the management is of the view that the clients future spending will be focused on increasing operational efficiency so as to save cost. Hence, outsourcing giants like TCS are sure to gain.

We recommended a 'BUY' on TCS in October, 2009. The stock is up 32% since then. At current levels, we have a ‘HOLD’ view on the stock from a 2 to 3 years perspective

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