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TCS: Muted operating performance
Jan 16, 2014

Tata Consultancy Services (TCS) has announced its third quarter results for financial year 2013-2014 (3QFY14). The company reported a 1.5% quarter-on-quarter (QoQ) growth in its consolidated sales and a 15.1% QoQ increase in its consolidated net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 1.5% QoQ in 3QFY14. Sales growth in constant currency terms grew by 3.8% QoQ.
  • The operating margin fell by 0.2% QoQ to 31.4% during the quarter as compared to 31.6% seen during the previous quarter (2QFY14). On an absolute basis, the operating profits increased by 0.8% QoQ.
  • The other income saw a huge jump to come in at Rs 6830.7 m for the quarter.
  • The sharp rise in other income helped the profit before tax (PBT) to grow by a healthy 11.9% QoQ.
  • The tax rate for the quarter stood at 23.3% compared to 25.4% in the previous quarter. The net profit came in at Rs 53,334 m. This was higher by 15.1% QoQ.
  • The company has declared a dividend of Rs 4 per share.
(Rs m) 2QFY14 3QFY14 Change 9MFY13 9MFY14 Change
Sales 209,772 212,940 1.5% 465,594 602,583 29.4%
Expenditure 143,443 146,072 1.8% 331,369 417,944 26.1%
Operating profit (EBITDA) 66,330 66,868 0.8% 134,225 184,638 37.6%
Operating profit margin (%) 31.6% 31.4%   28.8% 30.6%  
Other income (257.1) 6,831   7,358 9,159 24.5%
Finance Costs 127 71 -44.4% 296 265 -10.5%
Depreciation 3,279 3,493 6.5% 7,900 9,743 23.3%
Profit before tax 62,667 70,135 11.9% 133,387 183,789 37.8%
Tax 15,947 16,362 2.6% 29,207 44,567 52.6%
Minority Interest 387 439 13.3% 1,163 1,160 -0.3%
Profit after tax/(loss) 46,333 53,334 15.1% 103,017 138,063 34.0%
Net profit margin (%) 22.1% 25.0%   22.1% 22.9%  
No. of shares         1,957.2  
Diluted earnings per share (Rs)*         89.0  
P/E ratio (x)*         25.1  
* On a trailing 12 months basis

What has driven the performance in 3QFY14?
  • In terms of business from different geographic segments, Asia-Pacific and Europe witnessed good growth of 5.8% QoQ and 5.1% QoQ. However the India business witnessed a fall in revenues by 7.3% QoQ.

  • In terms of industry verticals, strong growth was witnessed in manufacturing (6.3%), media (6.1%), healthcare (5.1%), telecom (4.8%) and travel (4.5%) all on a QoQ basis.

  • In terms of service offerings, most of the service offerings saw a muted growth but the asset leveraged solutions business witnessed a fall of 13.5% on a QoQ basis.

    Revenue break-up
    (Rs m) 2QFY14 3QFY14 Change
    On the basis of industry verticals
    BFSI 90,412 90,925 0.6%
    Telecom 19,509 20,442 4.8%
    Manufacturing 17,621 18,739 6.3%
    Retail & Distribution 29,158 29,386 0.8%
    Hi-Tech 11,328 11,286 -0.4%
    Life Sciences & Healthcare 11,957 12,563 5.1%
    Travel & Hospitality 7,132 7,453 4.5%
    Energy & Utilities 7,971 8,092 1.5%
    Media & Entertainment 4,615 4,898 6.1%
    Others 10,069 9,156 -9.1%
    On the basis of service offerings
    Application Development & Maintenance 87,475 88,157 0.8%
    Enterprise Solutions 32,305 33,432 3.5%
    Assurance Services 17,831 18,100 1.5%
    Engg. & Industrial Services 9,859 9,795 -0.6%
    Infrastructure Services 24,753 25,553 3.2%
    Global Consulting 6,922 7,240 4.6%
    Asset Leverage Solutions 5,664 4,898 -13.5%
    BPO 24,963 25,766 3.2%
    On the basis of geography
    North America 111,599 112,219 0.6%
    Latin America 4,825 4,898 1.5%
    UK 36,291 37,264 2.7%
    Continental Europe 23,495 24,701 5.1%
    India 14,474 13,415 -7.3%
    Asia Pacific 14,894 15,758 5.8%
    MEA 4,195 4,685 11.7%

  • In terms of the operational performance, the management stated that the fall in revenues was largely a result of the rupee appreciation. The company did witness operational efficiencies of about 65 basis points but reinvested an amount equal to 62 basis points back in to the business.

  • At the net level, bottomline improved by 15.1% on a QoQ basis. The other income of Rs 6830.7 m was largely responsible for the jump in the net profit compared to the rise in the operating profit.
What to expect?
At of the current price of Rs 2,230 the stock of TCS is trading at a trailing twelve months (TTM) price-earnings (P/E) multiple of 25.1 times.

TCS had decent quarter in 3QFY14 but it was a far cry from the performance seen in the last quarter. The company's main service lines of Enterprise Solutions, Infrastructure Management Services (IMS) and BPO helped to maintain the constant currency growth of 3.8% on a QoQ basis.

The management clarified that the minor margin contraction seen in this quarter was largely as a result of the rupee appreciation and not due to cost pressures. If fact they said that margins would have improved but for the big investments made by the company in sales and marketing efforts.

TCS won 8 large deals in this quarter. The management stated that the deal pipeline was healthy and more large deals would be signed in the coming two quarters. These contracts are to be executed over the next two years.

The management stated that they expect they domestic business to remain soft at least till the end of the September quarter of this year. However they are seeing continued pick-up in business activity in their largest markets of the US as well as Europe. The manufacturing sector in developed markets is also seeing a recovery.

In terms of newer digital technologies life social, media, analytics and cloud computing (SMAC), the management stated that the opportunity was big, at least a few billion dollars worth of revenues in the next two years. Also the company has made huge investments in this area and the sequential growth of these technologies would rise over the next few quarters.

The long term growth story for the company remains intact. However keeping the valuations in mind we re-iterate our 'Hold' view on the stock of TCS.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested and that no single stock comprises more than 5% of your portfolio.

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