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TCS: Pressing all levers TCS: Pressing all levers - Views on News from Equitymaster

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TCS: Pressing all levers TCS: Pressing all levers

Jan 16, 2008

Introduction to results
  • Revenue grows by 5% QoQ in 3QFY08 driven by 5.3% QoQ rise in volumes and 0.5% QoQ higher pricing.
  • EBITDA margins expand by 0.3% QoQ during the quarter, mainly due to cost rationalisation.

  • Net profits grow by 6% QoQ in 3QFY08, aided by lower taxes.

  • Adds 54 new clients and 7,200 employees during the quarter. Attrition rate stood at 12.2%.

  • Declares interim dividend of Rs 3 per share (dividend yield of 0.3%).

Consolidated financial performance: A snapshot…
(Rs m) 2QFY08 3QFY08 Change 9mFY07 9mFY08 Change
Sales 56,397 59,230 5.0% 135,231 167,656 24.0%
Expenditure 41,610 43,549 4.7% 98,534 123,802 25.6%
Operating profit (EBITDA) 14,787 15,681 6.0% 36,697 43,854 19.5%
Operating profit margin (%) 26.2% 26.5%   27.1% 26.2%  
Other income (Net) 1,221 1,190 -2.5% 1,293 4,029 211.6%
Interest & depreciation 1,431 1,518 6.1% 3,092 4,271 38.1%
Profit before tax 14,577 15,353 5.3% 34,898 43,612 25.0%
Minority interest and share of profit of associates 16 86 425.0% 288 212 -26.4%
Tax 2,045 2,001 -2.2% 4,436 5,588 26.0%
Profit after tax/(loss) 12,516 13,267 6.0% 30,174 37,812 25.3%
Net profit margin (%) 22.2% 22.4%   22.3% 22.6%  
No. of shares (m)         978.6  
Diluted earnings per share (Rs)*         50.9  
P/E ratio (x)         18.2  
*On a trailing twelve months basis

What has driven performance in 3QFY08?
  • TCS reported a 5% QoQ growth in topline during 3QFY08. This was driven by 5.3% QoQ growth in volumes and 0.5% QoQ growth in pricing. The shift in offshore-onsite volume share also contributed to 0.8% of the topline growth. Rupee appreciation and the consequent foreign exchange adjustments had a negative impact on the topline to the tune of 1.6%. The company won many large deals during the quarter, which are expected to bring stable volume growth going forward. TCS added 54 new clients during the quarter and little over 7,200 employees. However, the attrition rate went up marginally to 12.2% (11.7% in 2QFY08). Despite this increase, TCS still has the lowest attrition in the industry, which is commendable. The company has already made 22,000 campus offers for FY09 indicating that demand pipeline continues to be robust.

    TCS’ service offerings:
      2QFY08   3QFY08  
    Service lines Revenue share Revenue (Rs m)   Revenue share Revenue (Rs m) QoQ growth
    Application Development and Maintainance 48.6% 27,409   53.5% 31,688 15.6%
    Business Intelligence 9.7% 5,471   9.5% 5,627 2.9%
    Engineering and Industrial Services 5.3% 2,989   5.4% 3,198 7.0%
    Infrastructure Services 6.9% 3,891   5.5% 3,258 -16.3%
    Enterprises Solutions 12.8% 7,219   11.8% 6,989 -3.2%
    Global Consulting 3.3% 1,861   3.4% 2,014 8.2%
    Asset Leverage Solutions 3.4% 1,918   2.8% 1,658 -13.5%
    Assurance Services 3.8% 2,143   2.3% 1,362 -36.4%
    Businee Process Outsourcing 6.2% 3,497   5.8% 3,435 -1.8%

  • TCS’ EBITDA margins expanded by 0.3% QoQ during the quarter, aided by 1.3% QoQ improvement in pricing, productivity and S, G&A leverage. Appreciation in rupee had a negative impact of 0.9% QoQ on margins. The operating margins have come down by 0.9% YoY on 9-month comparison mainly due to the rupee appreciation impact in the first two quarters. The company has been able to maintain its margins, which we believe is quite commendable as the macro factors (especially rupee’s appreciation against the US dollar) are seemingly going against the industry.

    TCS’ industry verticals :
      2QFY08   3QFY08  
    Service lines Revenue share Revenue (Rs m)   Revenue share Revenue (Rs m) QoQ growth
    US 52.2% 29,439   51.9% 30,740 4.4%
    Latin America 4.2% 2,369   4.6% 2,725 15.0%
    UK 19.9% 11,223   20.1% 11,905 6.1%
    Europe 8.4% 4,737   8.5% 5,035 6.3%
    India 8.2% 4,625   7.9% 4,679 1.2%
    Asia Pacific 5.2% 2,933   5.6% 3,317 13.1%
    Middle East and Africa 1.9% 1,072   1.4% 829 -22.6%

  • The company’s bottomline expanded by 6% QoQ largely aided by lower taxes. Net profit growth was 25% YoY during the 9-month period. We have estimated a net profit growth of 27.7% for TCS for FY08 and as such, the 9mFY08 performance almost seems in line.

What to expect?
At the current price of Rs 925, the stock is trading at a multiple of 10.9 times our estimated FY10 earnings. TCS has done well to pare the pressure on its margins despite the sharp spike in the value of rupee against the US dollar over the past nine-months. Almost in line with Infosys, this has been due to improving productivity levels, sustained volume growth and SG&A leverage, we be believe are more critical levers in the hands of these software companies to sustain margins in the long term. Overall, we maintain our positive view on the stock.

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