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TCS: Employee bonus hurts profits
Apr 16, 2015 | Updated on Apr 17, 2015

India's largest software firm, Tata Consultancy Services (TCS) has announced its fourth quarter and full year results for financial year 2014-2015. The company reported a 1.1% quarter-on-quarter (QoQ) fall in its consolidated sales and a massive 30.3% QoQ decrease in its consolidated net profits in 4QFY15. Here is our analysis of the results.

Performance summary
  • Net sales fell by 1.1% QoQ in 4QFY15. The sales in constant currency terms were up by 1.6% QoQ.
  • The operating performance was poor. The operating margin fell by 11.1% QoQ to 17.7% during the quarter. On an absolute basis, the operating profits fell by 39.3% QoQ. This was largely due to a special bonus amounting to Rs 26.28 bn paid out to employees in the quarter. Thus, the total employee expenses increased by 26.1% QoQ in the quarter.
  • The other income increased sharply by 76.5% QoQ and came in at Rs 11,362 m for the quarter. The other income was boosted by a forex gain of Rs 6.6 bn.
  • The net profit came in at Rs 37,127 m. This was lower by 30.3% QoQ.
  • The company has declared a final dividend of Rs 24 per share.

Consolidated Financial Snapshot
(Rs m) 3QFY15 4QFY15 Change FY14 FY15 Change
Sales 245,011 242,198 -1.1% 818,094 946,484 15.7%
Expenditure 174,531 199,390 14.2% 566,566 701,667 23.8%
Operating profit (EBITDA) 70,480 42,808 -39.3% 251,528 244,817 -2.7%
Operating profit margin (%) 28.8% 17.7%   30.7% 25.9%  
Other income 6,439 11,362 76.5% 16,367 32,299 97.3%
Finance Costs 180 111 -38.5% 385 1,042 170.5%
Depreciation 4,619 4,701 1.8% 13,492 17,987 33.3%
Exceptional Items - -   - 4,898  
Profit before tax 72,121 49,358 -31.6% 254,019 262,985 3.5%
Tax 18,237 11,813 -35.2% 60,700 62,388 2.8%
Minority Interest 608 418 -31.3% 1,680 2,075 23.5%
Profit after tax/(loss) 53,276 37,127 -30.3% 191,639 198,522 3.6%
Net profit margin (%) 21.7% 15.3%   23.4% 21.0%  
No. of shares         1,958.7  
Diluted earnings per share (Rs)*         101.4  
P/E ratio (x)*         24.6  
*On a trailing 12 months basis

What has driven the performance in 4QFY15?
  • In terms of industry verticals, service lines and geographies growth remained fairly muted in 4QFY15 (in reported Rupee terms) largely due to the strength in the US dollar. The Telecom and the Energy verticals had a disappointing quarter. The Consulting division also faced headwinds in the quarter.

    Revenue Breakup
    (Rs m) 3QFY15 4QFY15 Change
    On the basis of industry verticals
    BFSI 99,230 98,332 -0.9%
    Telecom 21,806 19,618 -10.0%
    Manufacturing 24,746 24,704 -0.2%
    Retail & Distribution 32,832 32,939 0.3%
    Hi-Tech 14,456 14,532 0.5%
    Life Sciences & Healthcare 15,681 16,227 3.5%
    Travel & Hospitality 8,575 8,235 -4.0%
    Energy & Utilities 10,290 9,446 -8.2%
    Media & Entertainment 6,615 6,539 -1.1%
    Others 10,781 11,625 7.8%
    On the basis of service offerings
    Application Development & Maintenance 96,780 97,121 0.4%
    Enterprise Solutions and Business Intelligence 37,732 37,298 -1.1%
    Assurance Services 20,826 20,345 -2.3%
    Engineering & Industrial Services 11,026 10,899 -1.1%
    Infrastructure Services 35,037 35,119 0.2%
    Global Consulting 9,065 7,750 -14.5%
    Asset Leverage Solutions 5,880 5,571 -5.3%
    BPO 28,666 28,095 -2.0%
    On the basis of geography
    North America 127,161 126,912 -0.2%
    Latin America 5,145 5,086 -1.1%
    UK 39,447 38,509 -2.4%
    Continental Europe 28,666 26,884 -6.2%
    India 15,926 15,985 0.4%
    Asia Pacific 23,766 23,735 -0.1%
    MEA 4,900 5,086 3.8%

  • In terms of operational performance, the employee bonus impacted margins. However, excluding this bonus (which is a one-off) the operating margin was 27.2% in 4QFY15.

  • The bottomline performance was also impacted the employee bonus. Excluding this, the net margin for the quarter was 24.4% in the quarter. For the full year FY15 the net profit was up 3.6 YoY.
What to expect?
At of the current price of Rs 2,490 the stock of TCS is trading at a trailing twelve months (TTM) price/earnings (P/E) multiple of 24.6 times.

TCS had a good year in FY15. Despite facing multiple challenges, the company has managed to maintain growth and profitability. In constant currency (CC) terms, the revenues grew by 17% YoY in FY15 and operating margins were stable (excluding forex fluctuations and the employee bonus). The management stated that growth from Telecom, Energy and Insurance sectors (which were muted in FY15) would under pressure going forward as well. They provided no guarantees about specific growth numbers for any vertical.

However, they maintained that the company's growth would continue to exceed the NASSCOM revenue guidance for FY16 of 12-14% YoY. They reiterated their endeavor to maintain operating margins between 26-28% in CC terms. They also stated that the outlook for pricing was stable and growth was likely to remain broad based across segments, geographies as well as verticals (ex telecom, energy and Insurance).

The company's order book as well as the deal pipeline remains very strong. This provides good revenue growth visibility for several quarters ahead. TCS added 5, 15 and 26 clients in the US$ 100 m, the US$ 50 m and the US$ 20 m categories respectively in FY15.

In 4QFY15, the company's foreign subsidiaries faced the challenge of a rising US dollar. This along with the employee bonus makes the 4QFY15 numbers un-comparable to the 3QFY15 numbers. However, the core business continues to remain strong.

TCS added 19,192 employees (net) in FY15, ending the year with a head count of 319,656. The attrition rate was 13.8% for the IT services segment and 14.9% including the BPO division. The utilisation rate stood at 85.4% excluding trainees which is an all time high.

The fundamentals of TCS remain strong. The long term story is firmly intact. In our February 2015 Stock Select report we had recommended investors should wait for lower levels before entering the stock. We maintain the same view.

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