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TCS: A decent start to FY16 - Views on News from Equitymaster
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TCS: A decent start to FY16
Jul 9, 2015

India's largest software firm, Tata Consultancy Services (TCS) has announced its financial results for first quarter financial year 2015-2016. The company has reported a 6% quarter-on-quarter (QoQ) increase in its consolidated sales and a 53.1% QoQ increase in its consolidated net profits in 1QFY16. Here is our analysis of the results.

Performance summary
  • Net sales increased by 6% QoQ in 1QFY16. Volumes were up by 4.8% QoQ.
  • The operating performance was good. The operating margin improved from 17.7% in 4QFY15 to 28% in 1QFY16. On an absolute basis, the operating profits increased by 68.1% QoQ. This was largely due to the fact that the company had declared a special bonus amounting to Rs 26.28 bn for employees in the last quarter (4QFY15). This had impacted the operating performance for 4QFY15. Adjusting for this one-off, the operating profit was up by 4.1% QoQ.
  • The other income decreased sharply by 34.8% QoQ and came in at Rs 7,403 m for the quarter. The other income includes a forex gain of Rs 1,966.4 m.
  • The net profit came in at Rs 56,841 m. This was higher by 53.1% QoQ. However, on a YoY basis, the net profit was higher by 2.1%.
  • The company has declared an interim dividend of Rs 5.50 per share to be paid out to share holders on 03 August 2015. The record date for the same is 21 July 2015.

Consolidated Financial Snapshot
(Rs m) 4QFY15 1QFY16 Change
Sales 242,198 256,681 6.0%
Expenditure 199,390 184,730 -7.4%
Operating profit (EBITDA) 42,808 71,952 68.1%
Operating profit margin (%) 17.7% 28.0%  
Other income 11,362 7,403 -34.8%
Finance Costs 111 43 -61.1%
Depreciation 4,701 4,708 0.1%
Exceptional Items - -  
Profit before tax 49,358 74,604 51.1%
Tax 11,813 17,195 45.6%
Minority Interest 418 567 35.8%
Profit after tax/(loss) 37,127 56,841 53.1%
Net profit margin (%) 15.3% 22.1%  
No. of shares   1,958.7  
Diluted earnings per share (Rs)*   101.9  
P/E ratio (x)*   24.3  
* On a trailing twelve month basis

What has driven performance in 1QFY16?
  • In terms of industry verticals, service lines and geographies growth remained fairly broad based in 1QFY16. Pressure came from the media sector, the consulting service line and the geographies of Latin America and Japan.

    Revenue break-up
    On the basis of industry verticals 4QFY15 1QFY16 Change
    BFSI 98,332 104,213 6.0%
    Telecom 19,618 22,075 12.5%
    Manufacturing 24,704 25,411 2.9%
    Retail & Distribution 32,939 35,422 7.5%
    Hi-Tech 14,532 14,888 2.4%
    Life Sciences & Healthcare 16,227 17,711 9.1%
    Travel & Hospitality 8,235 8,984 9.1%
    Energy & Utilities 9,446 10,267 8.7%
    Media & Entertainment 6,539 6,417 -1.9%
    Others 11,625 11,294 -2.9%
    On the basis of service offerings
    Application Development & Maintenance 97,121 103,442 6.5%
    Enterprise Solutions and Business Intelligence 37,298 38,759 3.9%
    Assurance Services 20,345 21,818 7.2%
    Engg. & Industrial Services 10,899 11,551 6.0%
    Infrastructure Services 35,119 37,732 7.4%
    Global Consulting 7,750 7,444 -4.0%
    Asset Leverage Solutions 5,571 6,417 15.2%
    BPO 28,095 29,518 5.1%
    On the basis of geography
    North America 126,912 135,528 6.8%
    Latin America 5,086 4,877 -4.1%
    UK 38,509 41,326 7.3%
    Continental Europe 26,884 28,235 5.0%
    India 15,985 16,428 2.8%
    Asia Pacific 23,735 24,641 3.8%
    MEA 5,086 5,647 11.0%

  • In terms of operational performance, adjusting for the one-off employee bonus in the last quarter this quarter was good. The company has doled out industry leading wage hikes in the quarter. Visa costs were seasonally higher in the quarter. Despite this, the EBIT margins have been maintained in the 26%-28% band that the management is comfortable with. Employee utilization continues to scale new highs and stands at 86.3% (excluding trainees).

  • The bottomline number is not comparable sequentially. However, the net margin of 22.1% is stable from a historical point of view.
What to expect?
At of the current price of Rs 2,480 the stock of TCS is trading at a trailing twelve months (TTM) price/earnings (P/E) multiple of 24.3 times.

TCS has made a decent start to FY16. 3.5% QoQ topline growth in constant currency terms if maintained throughout the year will ensure the company remains ahead of the industry. Deal wins continues to maintain the recent momentum. In the quarter the company added 7 US$ 10 m clients, 3 US$ 20 m clients and 1 client each in the US$ 50 m and US$ 100 m categories.

The growth from the newer digital technologies is clearly leading the way. The management has finally provided a number for the contribution of revenues from this business. It must be kept in mind that digital revenues are difficult to classify separately. This is because there are not many 100% pure digital services deals and hardly any large ones. It is usually embedded within traditional IT services contracts. Thus, the management has chosen to be conservative and has stated a figure of 12.5% of revenues from the digital business. This business is growing very fast and will contribute a large part of revenues going forward. The company has begun a massive training program for digital technologies with an aim to train over 1,00,000 people within the next few months.

Attrition has been a concern recently. It has inched up from around 13% last year to 15.9% in 1QFY16. The management has stated that they have already taken several steps to contain the same. This quarter is seasonally weak from an attrition point of view. Thus, the next quarter will provide a clearer sign about this trend.

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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Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

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  1. Equitymaster has financial interest in TCS ( hereinafter referred to as ‘subject company’)
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