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TCS: Volumes steal the show
Jan 18, 2011

TCS has announced its 3QFY11 results. Its sales grew by 4% QoQ while net profits were up 9%QoQ during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales grew by 4.1% QoQ in 3QFY11, largely driven by 5.7% growth in volumes.
  • Operating margins improve by 0.1% QoQ to 30.0% during the quarter.
  • Adds a net of around 12,500 employees during the quarter. Attrition rate up marginally and currently stands at 14.4%, as compared to 14.1% at the end of the previous quarter (2QFY11).
  • Net profit grows by 9.2% QoQ during the quarter. This was driven by the growth in revenues and other income.
  • Adds 35 new clients during the quarter. The total number of active clients at the end of the quarter was 959.
  • Declares an interim dividend of Rs 2 per share (yield of 0.2%).


Consolidated financial snapshot
(Rs m) 2QFY11 3QFY11 Change 9MFY10 9MFY11 Change
Sales 92,864 96,634 4.1% 222,908  271,670 21.9%
Expenditure 65,102 67,637 3.9% 159,353   190,817 19.7%
Operating profit (EBITDA)   27,762 28,997 4.4%  63,555  80,853 27.2%
Operating profit margin (%) 29.9% 30.0%   28.5% 29.8%  
Other income   708    1,942 174.5% 824     3,604 337.2%
Depreciation    1,725    1,884 9.2% 4,919     5,224 6.2%
Interest 153    49 -68.1% 109  228 109.4%
Profit before tax 26,592 29,006 9.1%   59,351 79,005 33.1%
Tax    4,601    5,041 9.6% 8,771   13,671 55.9%
Minority interest 298 266 -10.7% 577.5  881 52.5%
Share of profit of associates -     -   2.3       3 30.4%
Profit after tax/(loss) 21,692 23,698 9.2%  50,001   64,451 28.9%
Net profit margin (%) 23.4% 24.5%   22.4% 23.7%  
No. of shares (m)       1,957.5 1,957.0  
Diluted EPS (Rs)*         43.2  
P/E*         27.1  
* On a trailing 12 months basis

What has driven performance in 3QFY11?
  • TCS grew its topline on the back of a robust volume growth of nearly 6% QoQ during the quarter. The growth in volumes was driven by improvement in demand, especially from the Asia-Pacific markets. Revenues from the UK and Europe continued their upward trend and recorded a growth of 8% QoQ during the quarter. Middle East and Africa (MEA) and North America regions supported the performance with 10% QoQ and 4% QoQ growth in sales respectively. Revenues from Latin America and India however witnessed declines of 17% QoQ and 3% QoQ respectively. Going forward, the management expects growth across all its geographies.

  • In terms of industry verticals, TCS saw a robust growth across almost all its key verticals. The major drivers were the 'media & entertainment', 'hi-tech' and 'transportation' verticals. These grew by 20%, 13%, and 11% QoQ respectively. The key segment of the company - banking and financial services (BFSI) - (45% of total sales) witnessed a healthy growth of 6% QoQ during the quarter. However, the telecom segment witnessed a decline of 3% QoQ.

  • In terms of service offerings, the 'Asset Leverage Solutions', 'Infrastructure Services' and the lucrative 'Global Consulting' registered growth of 22% QoQ, 16% QoQ and 14% QoQ respectively. The main service offering of ADM (application development and maintenance) clocked a marginal growth of 0.1% QoQ during the quarter. Growth in all of the key service offerings indicates that discretionary spending by the clients continues to be on the rise.

    Revenue Breakup
    (Rs m) 2QFY11 3QFY11 Change
    On the basis of industry verticals      
    BFSI 40,860  43,099 5.5%
    Telecom  11,887   11,499 -3.3%
    Manufacturing    6,872     6,958 1.2%
    Retail  10,122  10,533 4.1%
    Hi-Tech    4,272     4,832 13.1%
    Healthcare    4,736     5,025 6.1%
    Transportation    2,972     3,286 10.6%
    Energy & Utilities     3,993     4,252 6.5%
    Media & Entertainment     1,857     2,223 19.7%
    Others     5,293     4,928 -6.9%
    On the basis of service offerings      
    ADM  43,460  43,485 0.1%
    Business Intelligence    5,200     5,122 -1.5%
    Enterprise Solutions     9,565    9,277 -3.0%
    Assurance Services     6,129     6,861 11.9%
    Engg. & Industrial Services    4,550     4,638 1.9%
    Infrastructure Services    8,729  10,147 16.2%
    Global Consulting     1,950     2,223 14.0%
    Asset Leverage Solutions     3,157     3,865 22.4%
    BPO  10,122   11,016 8.8%
    On the basis of geography      
    North America  49,868   51,699 3.7%
    Ibero America     3,622     2,996 -17.3%
    UK  14,208   15,461 8.8%
    Continental Europe     8,451     8,987 6.3%
    India     9,194     8,890 -3.3%
    Asia Pacific    5,758     6,668 15.8%
    MEA     1,764     1,933 9.5%
    Source: Company

  • TCS added a net of around 12,500 employees during the quarter. The total employee base now stands at around 186,900. Attrition has increased to 14.4%. The management has indicated that it is trying to put measures in place to control the rising attrition. However, high attrition appears to be a bugbear for the entire IT industry. It also indicates a revival in industry growth.

  • TCS' operating margins increased marginally by 0.1% QoQ. There was a negative impact of 1.1% due to currency movement. However, this was offset by the 0.2% impact of offshore shift and 0.9% impact of improvement in rate and productivity as well as due to the efficiency in the SG&A spend. It was also boosted by the growth in the revenues on the back of healthier volumes and a 1.2% QoQ increase in prices..

  • The other income increased by a whopping 175% QoQ during the quarter mainly due to exchange income. There was a total exchange gain of Rs 521 m during the quarter.

What to expect?
At the current price of Rs 1,171, the stock is trading at a multiple of 22 times our estimated FY13 earnings. The management is upbeat about the demand environment. It expects an uptick in discretionary spending. It also expects pricing to remain stable with an upward bias. This is based on the new deals that the company has bagged.

The key concerns for TCS are high attrition as well as currency volatility. However, higher attrition rates are a key indicator of the growth in the industry. The company plans to hire another 12,000 to 15,000 employees during the last quarter of the year. The management did indicate that it would look at salary hikes during the next year. But it has declined to comment on the exact quantum of the same.

Given the company's strong performance during 3QFY11 and 9mFY11, we would have to revise upwards our forward estimates for the company. We would subsequently update our subscribers with our latest view on the stock.

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