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TCS: A decent quarterly performance - Views on News from Equitymaster
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TCS: A decent quarterly performance
Jan 15, 2015 | Updated on Jan 16, 2015

India's largest software firm, Tata Consultancy Services (TCS) has announced its third quarter results for financial year 2014-2015 (3QFY15). The company reported a 2.9% quarter-on-quarter (QoQ) growth in its consolidated sales and a 1.6% QoQ increase in its consolidated net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 2.9% QoQ in 3QFY15. Sales growth in constant currency terms was 2.5% QoQ.
  • The operating performance was good. The operating margin improved marginally by 0.2% QoQ to 28.8% during the quarter. On an absolute basis, the operating profits grew 3.6% QoQ.
  • The other income saw a fall of 2.8% QoQ and came in at Rs 6,439 m for the quarter.
  • The net profit came in at Rs 53,276 m. This was higher by 1.6% QoQ.
  • The company has declared an interim dividend of Rs 5 per share. The record date is 28th Jan 2015 and the payout date is 9th Feb 2015.

Consolidated Financial Snapshot
(Rs m) 2QFY15 3QFY15 Change 9MFY14 9MFY15 Change
Sales 238,165 245,011 2.9% 602,583 704,287 16.9%
Expenditure 170,161 174,531 2.6% 417,944 502,277 20.2%
Operating profit (EBITDA) 68,004 70,480 3.6% 184,638 202,010 9.4%
Operating profit margin (%) 28.6% 28.8%   30.6% 28.7%  
Other income 6,626 6,439 -2.8% 9,159 20,937 128.6%
Finance Costs 665 180 -73.0% 265 931 251.9%
Depreciation 4,492 4,619 2.8% 9,743 13,286 36.4%
Exceptional Items       -       -       - 4,898  
Profit before tax 69,473 72,121 3.8% 183,789 213,627 16.2%
Tax 16,351 18,237 11.5% 44,567 50,575 13.5%
Minority Interest 680 608 -10.6% 1,160 1,657 42.9%
Profit after tax/(loss) 52,443 53,276 1.6% 138,063 161,395 16.9%
Net profit margin (%) 22.0% 21.7%   22.9% 22.9%  
No. of shares         1,959  
Diluted earnings per share (Rs)*         109.8  
P/E ratio (x)*         23.1  
*On a trailing 12 months basis

What has driven the performance in 3QFY15?
  • In terms of industry verticals, service lines and geographies growth remained broad based in 3QFY15. Hi-Tech and the Healthcare verticals had a good quarter. The Infrastructure Management Services (IMS) service line continued to grow strongly. Growth from the Latin American region bounced back from the poor performance in the last quarter.

    Revenue Breakup
    (Rs m) 2QFY15 3QFY15 Change
    On the basis of industry verticals
    BFSI 96,219 99,230 3.1%
    Telecom 21,197 21,806 2.9%
    Manufacturing 24,055 24,746 2.9%
    Retail & Distribution 32,152 32,832 2.1%
    Hi-Tech 13,575 14,456 6.5%
    Life Sciences & Healthcare 15,004 15,681 4.5%
    Travel & Hospitality 8,336 8,575 2.9%
    Energy & Utilities 10,241 10,290 0.5%
    Media & Entertainment 6,430 6,615 2.9%
    Others 10,956 10,781 -1.6%
    On the basis of service offerings
    Application Development & Maintenance 96,457 96,780 0.3%
    Enterprise Solutions and Business Intelligence 37,154 37,732 1.6%
    Assurance Services 20,006 20,826 4.1%
    Engineering & Industrial Services 10,956 11,026 0.6%
    Infrastructure Services 32,867 35,037 6.6%
    Global Consulting 7,621 9,065 18.9%
    Asset Leverage Solutions 5,478 5,880 7.3%
    BPO 27,627 28,666 3.8%
    On the basis of geography
    North America 121,464 127,161 4.7%
    Latin America 4,525 5,145 13.7%
    UK 40,726 39,447 -3.1%
    Continental Europe 27,389 28,666 4.7%
    India 15,481 15,926 2.9%
    Asia Pacific 24,055 23,766 -1.2%
    MEA 4,525 4,900 8.3%

  • In terms of operational performance, the company's employee utillisation continued to scale new heights at 86.7% (excluding trainees). This along with good control over direct costs in the quarter helped the company post a 3.6% QoQ growth in operating profit.

  • The bottomline performance was muted due a sequentially higher tax rate of 25.3% compared to 23.5% in 2QFY15.
What to expect?
At of the current price of Rs 2,532 the stock of TCS is trading at a trailing twelve months (TTM) price/earnings (P/E) multiple of 23.1 times.

The December quarter is seasonally weak for IT firms. Thus, the muted performance is not really surprising. However, the company is in fine fettle. In constant currency terms, revenues were up 2.5% QoQ. The current order book as well as the deal pipeline remains very strong. This provides good revenue growth visibility for several quarters ahead.

The management stated once again that they would endeavor to maintain operating margins between 26-28%. It must be noted that margin expansion from these levels may remain capped as the company does not have a lot of room left to improve employee utillisation from these levels. That said the management dismissed rumors that they had plans to resort to large scale layoffs to boost margins. The voluntary attrition rate remained at comfortable levels of 13.4%. The total employee base of the company increased to 3,18,625 at the end of 3QFY15.

The fundamentals of TCS remain strong. The long term story is firmly intact. However, at current levels the valuations of the stock are not comfortable for entry. Therefore, we maintain our hold view on the stock.

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