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This is an entirely free service. No payments are to be made.Operating margins contract by 1.5% YoY for the fiscal. Significantly higher overseas business expenditure dents margins. Staff costs decline from 43% of sales in FY07 to 34% in FY08, thus lowering pressure on margins.
Net profits grow 19% YoY during FY08, decline 6% QoQ during 4QFY08. Contraction in operating margins and lower other income - the chief culprits of fourth quarter’s poor performance. Even if one were to exclude the one time exchange gain of Rs 671 m from 3QFY08 other income, net profits still show a QoQ decline for the fourth quarter. Full year profit 3% lower than our estimates.
Adds a net of 22,100 employees during the fourth quarter – manpower base stands at 111,400.
Recommends final dividend of Rs 5 per share (dividend yield of 0.5%).
(Rs m) | 3QFY08 | 4QFY08 | Change | FY07 | FY08 | Change |
Sales | 59,230 | 60,978 | 3.0% | 186,852 | 228,634 | 22.4% |
Expenditure | 43,549 | 45,297 | 4.0% | 135,464 | 169,098 | 24.8% |
Operating profit (EBITDA) | 15,681 | 15,681 | 0.0% | 51,389 | 59,536 | 15.9% |
Operating profit margin (%) | 26.5% | 25.7% | 27.5% | 26.0% | ||
Other income | 1,190 | 833 | -30.0% | 2,291 | 4,861 | 112.2% |
Depreciation | 1,442 | 1,598 | 10.8% | 4,402 | 5,637 | 28.1% |
Interest | 76 | 69 | -9.1% | 95 | 300 | 217.6% |
Profit before tax | 15,353 | 14,847 | -3.3% | 49,183 | 58,460 | 18.9% |
Tax | 2,001 | 2,275 | 13.7% | 6,640 | 7,863 | 18.4% |
Minority interest | 89 | 123 | 38.1% | 428 | 344 | -19.5% |
Share of profit of associates | 3 | (1) | -146.4% | 11 | 8 | -25.9% |
Profit after tax/(loss) | 13,267 | 12,448 | -6.2% | 42,126 | 50,260 | 19.3% |
Net profit margin (%) | 22.4% | 20.4% | 22.5% | 22.0% | ||
No. of shares (m) | 978.6 | |||||
Diluted earnings per share (Rs) | 51.4 | |||||
P/E ratio (x) | 19.3 |
Despite growing sales by 22% YoY, TCS ranks low amongst its peers if one were to compare their performance for FY08. While a key reason for this subdued performance on the topline front can be attributed to the rupee’s 11% YoY appreciation against the US dollar (which actually cost the company Rs 18 bn in revenue), the management has also indicated that it has seen slow ramp up in a couple of projects in the financial services space. This has impacted the company’s 4QFY08 performance, as sales for this period have grown by a mere 3% QoQ. The management expects these clients to ramp up over the next 2 quarters.
Based on industry verticals, banking and financial services (BFSI) was the lead performer, raking in sales growth of 26% YoY during the fiscal. This was followed by the telecom vertical where sales grew by 25% YoY. As for specific service offerings, the company’s application development and maintenance (ADM) service recorded a growth of 13% YoY during FY08. The share of this segment to TCS’ total sales, however, dropped to 48% as compared to 52% in FY07. A part of this decline in ADM’s share can be attributed, and positively, to the increased contribution from high value services like consulting and infrastructure management.
TCS’ operating margins contracted by 1.5% YoY during FY08, 0.5% higher than what we had estimated. The management indicated during the conference call that around 0.4% of the contraction could be attributed to the rupee’s appreciation against the US dollar. Based on specific cost heads, while salary costs declined from 42.8% of sales in FY07 to 34.4% in FY08, it was the substantial increase in overseas business expenditure that really hurt TCS hard on operating margins. These costs increased from 7.3% of sales in FY07 to 17.5% in FY08. A large part of this increase was owing to a three-fold jump in overseas employee allowances on the back of implementation of a new pay model effective May 2007.
TCS reported a 19% YoY growth in net profits for FY08, which was subdued on the back of a poor 4QFY08 performance, wherein profits declined by 6% QoQ. This can be attributed to delays in a few projects during the quarter, where initial costs have been booked. The bottomline performance for the fiscal would have been worse but for a 112% YoY jump in other income. This rise in other income was helped by Rs 2.6 bn inflow that the company recorded as exchange gains on its currency derivative contracts.
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