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TCS: Strong signs of revival - Views on News from Equitymaster
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TCS: Strong signs of revival
Apr 20, 2010

TCS has announced its FY10 results. The company has reported a 8% YoY and 33% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 1% QoQ in 4QFY10, 8% YoY during FY10.
  • Operating margins expand by 0.5% QoQ during the quarter and 3.2% YoY during FY10. Improvement largely on account of better cost management and higher employee utilisation.
  • Aided by better margins, net profit rises by 10% QoQ during the quarter. Profit growth for FY10 stands at a robust 33% YoY. Other income plays a significant part in profit growth during both these periods.
  • Adds 39 new clients and a record 10,775 employees (net) during the quarter. This takes the total number of active clients to 1,034. Total employee count stands at around 160,430 at the end of March, 2010. Attrition rate stands at 11.8% at the end of FY10.
  • Declares final dividend of Rs 4 per share and a special dividend of Rs 10 per share, taking the total dividend for FY10 to Rs 20 per share.
  • As against our estimates, while FY10 sales are exactly as we had estimated, net profits are higher by 16% as against our estimates. This is owing to a sharper than estimated rise in other income.

Consolidated financial snapshot
(Rs m) 3QFY10 4QFY10 Change FY09 FY10 Change
Sales 76,485 77,380 1.2% 278,129 300,288 8.0%
Expenditure 53,758 53,990 0.4% 206,431 213,343 3.3%
Operating profit (EBITDA) 22,727 23,390 2.9% 71,698 86,945 21.3%
Operating profit margin (%) 29.7% 30.2%   25.8% 29.0%  
Other income 655 1,900 190.0% -4,270 2,724  
Depreciation 1,679 1,690 0.6% 5,641 6,609 17.2%
Interest 37 50 36.6% 287 159 -44.6%
Profit before tax 21,667 23,550 8.7% 61,500 82,901 34.8%
Tax 3,225 3,200 -0.8% 8,390 11,971 42.7%
Minority interest 203 330 62.9% 540 908 68.1%
Share of profit of associates - 10   7 12 75.7%
Profit after tax/(loss) 18,239 20,010 9.7% 52,563 70,011 33.2%
Net profit margin (%) 23.8% 25.9%   18.9% 23.3%  
No. of shares (m)       978.7 1,956.9  
Diluted earnings per share (Rs)*         35.8  
P/E ratio (x)*         22.0  
* Trailing 12 months basis

What has driven performance in FY10?
  • TCS grew its topline by 1% QoQ during 4QFY10 on back of 4% QoQ increase in volumes. It clocked a robust topline growth of 8% YoY in FY10 primarily on back of 17% increase in volumes. The major driver of growth during FY10 was the banking and financial services (BFS) segment which contributes around 45% to TCS' total sales. The company also saw decent traction in the retail and healthcare segments which grew by 27% YoY and 25% YoY during FY10.

    As regards service offerings, TCS' 'global consulting' and 'asset leverage solutions' registered growth of 20% QoQ and 27% QoQ respectively during 4QFY10. Its assurance services and infrastructure management services also witnessed an uptick during 4QFY10. For FY10, TCS' ADM (application development and maintenance), 'Assurance services' and 'Infrastructure services' did well.

    Revenue Breakup
    (In Rs m) FY09 FY10 Change
    On the basis of industry verticals
    BFSI 117,649 133,628 13.6%
    Telecom 40,051 36,635 -8.5%
    Manufacturing 29,204 25,825 -11.6%
    Retail 28,647 36,335 26.8%
    Hi-Tech 18,078 15,014 -16.9%
    Healthcare 14,463 18,017 24.6%
    Transportation 11,403 10,510 -7.8%
    Energy & Utilities 7,788 9,009 15.7%
    Media & Entertainment 5,284 6,606 25.0%
    Others 5,563 8,708 56.6%
    On the basis of service offerings
    ADM 134,893 146,240 8.4%
    Business Intelligence 22,528 17,116 -24.0%
    Enterprise Solutions 35,044 31,530 -10.0%
    Assurance Services 11,960 15,014 25.5%
    Engg. & Industrial Services 16,688 15,014 -10.0%
    Infrastructure Services 22,250 25,224 13.4%
    Global Consulting 7,509 5,705 -24.0%
    Asset Leverage Solutions 8,066 9,909 22.9%
    BPO 19,191 34,533 79.9%
    On the basis of geography
    North America 143,236 158,552 10.7%
    Ibero America 13,072 14,114 8.0%
    UK 52,845 48,647 -7.9%
    Continental Europe 29,204 31,530 8.0%
    India 21,694 26,125 20.4%
    Asia Pacific 13,072 15,615 19.5%
    MEA 5,006 5,705 14.0%
    Source: Company

    In terms of geographies, the US which is the major market (53% of FY10 sales) continued to drive growth for TCS. The company's particular focus on India paid results in terms of a 6% QoQ and 20% YoY increase in revenues from domestic market in 4QFY10 and FY10 respectively. While the business environment improved in Continental Europe, UK and Ibero America remained largely muted.

    The company added a net of 10,775 employees during the quarter and 16,668 employees during FY10. The total employee base now stands at around 160,429 and attrition rate at 11.8%.

  • TCS' operating margins improved by 0.5% QoQ and 3.2% YoY during 4QFY10 and FY10 respectively. This came on account of better cost management and improved employee utilisation. This performance is particularly good in view of the highly volatile currency environment. The pricing remained stable for the company.

  • TCS reported a 10% QoQ growth in net profits during 4QFY10. The same stood at 33% YoY for FY10. This was mainly on account of expansion in operating margins coupled with an increased other income component.

What to expect?
At the current price of Rs 787, the stock is trading at a multiple of 20.8 times our estimated FY12 earnings.

During the analyst conference call that was held yesterday, TCS' management appeared highly satisfied by the company's overall performance during FY10. It appeared upbeat about the comeback in demand for IT services in the global markets, particularly the US and Continental Europe. It was also enthused by the traction witnessed in the Indian market. However the sluggish turnaround witnessed in geographies like UK and in industry verticals like manufacturing, hi-tech and telecom remains a cause of concern for the company.

The management hinted that while the company is witnessing some sporadic large transformation deals, most of the new projects are 'running-the-business' kind of applications. This suggests that while demand for low-end services has returned, discretionary IT spending is still to show a turnaround. Nevertheless, it appears that the pricing levels have stabilised for the company, with some pricing power expected to return in latter half of FY11. Going forward, currency volatility and tax regime in India (in terms of direct tax and SEZ policies) will remain significant determinants of growth. The annual wage hike of 13% at offshore and around 2-4% at onsite along with increased head count will put some pressure on margins in the short term.

At current levels, we have a positive view on the stock from a 2 to 3 years perspective.

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