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TCS: Ringing caution bells - Views on News from Equitymaster
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TCS: Ringing caution bells
Apr 20, 2009

Performance summary
  • Net sales grow by 23% YoY in FY09 aided by strong growth in volumes while billing rates came under pressure.
  • Operating margins expand by 0.5% YoY during the fiscal.
  • Profit after tax grows by 5% YoY during the fiscal, declines by 2% QoQ during the fourth quarter.
  • Adds 163 new clients and 32,354 net employees during the fiscal. Attrition rate stands at 11.4%.
  • Recommends 1:1 bonus share issue and final dividend of Rs 5 per share (total dividend for FY09 stands at Rs 14 per share, or a dividend yield 2.5%)

Consolidated financial snapshot
(Rs m) 3QFY09 4QFY09 Change FY08 FY09 Change
Sales 72,770 71,720 -1.4% 226,195 278,129 23.0%
Expenditure 53,334 53,250 -0.2% 169,081 206,431 22.1%
Operating profit (EBITDA) 19,437 18,470 -5.0% 57,114 71,698 25.5%
Operating profit margin (%) 26.7% 25.8%   25.2% 25.8%  
Other income (1,720) (1,300)   7,283 (4,270)  
Depreciation 1,472 1,650 12.1% 5,637 5,641 0.1%
Interest 103 60 -41.8% 300 287 -4.5%
Profit before tax 16,142 15,460 -4.2% 58,460 61,501 5.2%
Tax 2,401 1,940 -19.2% 7,863 8,390 6.7%
Minority interest 120 190 58.3% 344 540 56.9%
Share of profit of associates   -   (8) 7  
Profit after tax/(loss) 13,621 13,330 -2.1% 50,260 52,564 4.6%
Net profit margin (%) 18.7% 18.6%   22.2% 18.9%  
No. of shares (m)       978.6 978.7  
Diluted earnings per share (Rs)         53.7  
P/E ratio (x)         10.4  

What has driven performance in FY09?
  • TCS grew its topline by 23% YoY during FY09 and the company crossed the US$ 6 bn revenue mark (based on the average exchange rate used by the company). This was mainly aided by an 18% YoY increase in volumes. Despite the ongoing financial turmoil, revenues from TCS’ ‘banking and financial service and insurance’ segment remained flat during the fourth quarter. Other segments which showed decent growth during the quarter included retail, healthcare, transportation and utility. These verticals grew by 6%, 8%, 1% and 2% QoQ respectively. However, manufacturing and Hi-Tech segments witnessed decline in revenue of 9% and 19% QoQ respectively. The management indicated in its conference call that the company is not having clear visibility on these two verticals, and they remain a cause for concern.

    As regards geographic performance, TCS saw good amount of traction in its Indian operations, as revenues here grew by 11% QoQ during 4QFY09. However, revenues from continental Europe and UK declined by 0.5% and 4.6% QoQ respectively. The company added a net of 32,354, net employees during the fiscal. The total employee base now stands at around 1 43,761, while attrition is at 11.4%.

  • TCS’ operating margins expanded by 0.6% YoY during FY09. A higher share of revenues from offshore services, higher volume growth and depreciation of rupee aided margins during the fiscal. The company has also managed to control cost during the fiscal which has helped in margin improvement.

  • TCS reported around 5% YoY growth in net profits during FY09. This was mainly on account of forex losses that it incurred on the back of the currency’s volatile movement against the US dollar and the British pound. Excluding these forex adjustments (gain of Rs 5,005 m in FY08 and loss of Rs 7,814 m in FY09), net profits for the fiscal have grown by 33% YoY.

What to expect?
At the current price of Rs 565, the stock is trading at a multiple of 8.8 times our estimated FY11 earnings. TCS has outperformed our revenue and profit estimates for FY09 by 4% and 9% respectively. In its conference call, the management has indicated that it is viewing the current environment with caution. Amidst the slowdown, the company is witnessing pressure on the pricing front. The management is not very clear about the budgets of their clients at this point of time. However, it sees growth on account of healthy pipeline the company has at present. TCS has inked 29 large deals during the fiscal. The company is also expected to maintain margins by controlling its costs going forward. The management has indicated that it has stopped lateral hiring and will induct new employees in a phased manner. The management has also indicated it is not witnessing any negative trend on account of growing protectionism in the US. We maintain our positive view on the stock from a 2 to 3 years perspective.

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