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TCS: A dull end to the year

Apr 16, 2014

India's largest software firm, Tata Consultancy Services (TCS) has announced its fourth quarter results for financial year 2013-2014 (4QFY14). The company reported a 1.2% quarter-on-quarter (QoQ) growth in its consolidated sales and a 0.5% QoQ increase in its consolidated net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 1.2% QoQ in 4QFY14. Sales growth was largely driven by the banking, financial services and insurance vertical.
  • The operating margin fell by 0.4% QoQ to 31% during the quarter as compared to 31.4% seen during the previous quarter (3QFY14). On an absolute basis, the operating profits did not witness any growth in the quarter due to a faster sequential growth in operating costs compared to the growth in sales.
  • The other income saw a muted growth of just 5.5% QoQ and came in at Rs 7,208.9 m for the quarter.
  • Largely due to the muted operating performance, the profit before tax (PBT) grew by a mere 0.1% QoQ.
  • The tax rate for the quarter stood at 23% compared to 23.3% in the previous quarter. The net profit came in at Rs 53,576 m. This was higher by just 0.5% QoQ.
  • The company has declared a final dividend of Rs 20 per share.

Consolidated Financial Snapshot
(Rs m) 3QFY14 4QFY14 Change FY13 FY14 Change
Sales 212,940 215,511 1.2% 629,895 818,094 29.9%
Expenditure 146,072 148,621 1.7% 449,496 566,566 26.0%
Operating profit (EBITDA) 66,868 66,890 0.0% 180,399 251,528 39.4%
Operating profit margin (%) 31.4% 31.0%   28.6% 30.7%  
Other income 6,831 7,209 5.5% 11,782 16,367 38.9%
Finance Costs 71 121 70.9% 485 385 -20.6%
Depreciation 3,493 3,749 7.3% 10,799 13,492 24.9%
Profit before tax 70,135 70,229 0.1% 180,897 254,019 40.4%
Tax 16,362 16,133 -1.4% 40,140 60,700 51.2%
Minority Interest 439 520 18.6% 1,584 1,680 6.1%
Profit after tax/(loss) 53,334 53,576 0.5% 139,173 191,639 37.7%
Net profit margin (%) 25.0% 24.9%   22.1% 23.4%  
No. of shares         1958.7  
Diluted earnings per share (Rs)*         97.8  
P/E ratio (x)*         22.6  
*On a trailing 12 months basis

What has driven the performance in 4QFY14?
  • In terms of business from different geographic segments, Europe was the star performer clocking a 5.6% QoQ growth. Latin America as well as the Middle East was laggards in 4QFY14.

  • In terms of industry verticals, strong growth was witnessed in Media & Entertainment as well as Life Sciences & Healthcare. On the other hand Telecom, Manufacturing and Retail verticals disappointed in the quarter.

  • In terms of service offerings, Asset Leverage Solutions and Engg. & Industrial Services led the growth in the quarter. Most other service lines witnessed muted growth.

    Revenue break-up
    (Rs m) 3QFY14 4QFY14 Change
    On the basis of industry verticals
    BFSI 90,925 92,454 1.7%
    Telecom 20,442 20,043 -2.0%
    Manufacturing 18,739 18,534 -1.1%
    Retail & Distribution 29,386 29,094 -1.0%
    Hi-Tech 11,286 11,422 1.2%
    Life Sciences & Healthcare 12,563 13,146 4.6%
    Travel & Hospitality 7,453 7,543 1.2%
    Energy & Utilities 8,092 8,189 1.2%
    Media & Entertainment 4,898 5,603 14.4%
    Others 9,156 9,482 3.6%
    On the basis of service offerings
    Application Development & Maintenance 88,157 88,359 0.2%
    Enterprise Solutions and Business Intelligence 33,432 33,835 1.2%
    Assurance Services 18,100 18,103 0.0%
    Engg. & Industrial Services 9,795 10,345 5.6%
    Infrastructure Services 25,553 25,861 1.2%
    Global Consulting 7,240 7,327 1.2%
    Asset Leverage Solutions 4,898 5,603 14.4%
    BPO 25,766 26,077 1.2%
    On the basis of geography
    North America 112,219 112,497 0.2%
    Latin America 4,898 4,741 -3.2%
    UK 37,264 38,361 2.9%
    Continental Europe 24,701 26,077 5.6%
    India 13,415 13,362 -0.4%
    Asia Pacific 15,758 15,948 1.2%
    MEA  4,685 4,526 -3.4%

  • In terms of operational performance TCS had a completely flat quarter as there was no improvement in the operating profit sequentially. The operating margin fell from 31.4% in 3QFY14 to 31% in 4QFY14. This was due to a faster rise in operating costs compared to sales on a QoQ basis.

  • At the net level, higher other income was offset by depreciation costs sequentially. Thus despite a marginal fall in the tax rate the net profit grew by just 0.5% QoQ.
What to expect?

At of the current price of Rs 2,215 the stock of TCS is trading at a trailing twelve months (TTM) price/earnings (P/E) multiple of 22.6 times.

TCS has ended an excellent FY14 on a rather dull note. Revenue growth in US dollar terms was just 1.9 on a QoQ basis. The standout performance came from Europe. The company’s sustained focus on this region has paid off. The continent (excluding the UK) now contributes 12.1% of revenues.

The management stated that despite FY14 being an exceptional year for the company, FY15 would be better. Their confidence was based on the deal pipe line, discussions with key clients, a pickup in discretionary spending in developed countries as well as strong growth seen in Asia-Pacific and Europe.

TCS won 9 large deals in the quarter and they were well spread out: one each in every vertical. The company had great success in FY14 in terms of large deal wins. In the year gone by, TCS added a record 7 customers in the US$ 100 m+ category.

The management stated that apart from the domestic business, the company was witnessing traction in all key markets and verticals. The growth is being driven by new digital technologies like social, mobile, analytics and cloud computing (SMAC) as well as traditional services.

We are very satisfied with the progress that TCS has been making. The long term growth story for the company remains firmly intact. However, keeping the valuations in mind, we re-iterate our 'Hold' view on the stock.

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