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TCS: Currency impact weakens performance
Jul 15, 2010

TCS declared its 1QFY11 results. The company has reported 6% QoQ growth in sales while net profits have declined by 5% QoQ. Here is our analysis of the results.

Performance summary
  • Net sales grow by 6 % QoQ in 1QFY11, largely driven by 8% growth in business from North America. Sales from Europe decline 6% QoQ.
  • Operating margins decline by 0.9% QoQ, largely owing to higher employee costs. The company adds a net of 3,270 employees during the quarter. Attrition rate rises to 13.1% at the end of the quarter.
  • Net profit declines by 5% QoQ. This is due to weaker operating margins and lower other income (down 50%). The company has suffered on account of adverse currency movements. The fall in margins would have been higher but for gains from higher offshoring revenues and disciplined pricing.
  • Adds 36 new clients during the quarter.
  • Declares an interim dividend of Rs 2 per share (yield of 0.3%).

Consolidated financial snapshot
(Rs m) 4QFY10 1QFY11 Change
Sales 77,380 82,173 6.2%
Expenditure 53,990 58,078 7.6%
Operating profit (EBITDA) 23,390 24,095 3.0%
Operating profit margin (%) 30.2% 29.3%  
Other income 1,900 955 -49.8%
Depreciation 1,690 1,615 -4.4%
Interest 50 27 -46.4%
Profit before tax 23,550 23,408 -0.6%
Tax 3,200 4,028 25.9%
Minority interest 330 316 -4.3%
Share of profit of associates 10 3 -70.0%
Profit after tax/(loss) 20,010 19,061 -4.7%
Net profit margin (%) 25.9% 23.2%  
No. of shares (m) 1,956.9 1,956.9  
Diluted EPS (Rs)*   37.7  
P/E*   20.8  
* On a trailing 12 months basis

What has driven performance in 1QFY11?
  • TCS grew its topline on the back of a robust volume growth of 8% QoQ during 1QFY11. This is the highest rate of growth in volumes since the quarter ended September 2008. There was a robust growth seen across all the verticals. The major drivers were the non BFSI segments like ‘energy & utilities’, and ‘media & entertainment’. These segments grew by 17% QoQ and 12% QoQ respectively. The main bread & butter of the company, the banking and financial services (BFSI) segment (45% of total sales) witnessed a healthy growth of 4% QoQ during the quarter.

  • In terms of service offerings, the ‘Assurance Services’ and ‘Infrastructure Services’ registered growth of 17% QoQ and 11% QoQ respectively. The main service offering of ADM (application development and maintenance) clocked a healthy growth of 7% QoQ during the quarter. However, the higher end offering segment of ‘Global Consulting’ saw a decline of 11% QoQ in sales. This was mainly due to the decline in discretionary spending by clients on the back of the crisis. This is expected to pick up going forward.

  • On a geographic basis, TCS’ performance was weighed down by Continental Europe where sales declined by 5% QoQ. However, recovery was seen from North America, Asia Pacific and the MEA (Middle East & Africa) regions. Sales growth here stood at 8%, 12%, and 12% QoQ respectively. Going forward, TCS expects growth in all its geographies especially in North America and Asia Pacific.

    Revenue Breakup
    (Rs m) 4QFY10 1QFY11 Change
    On the basis of industry verticals      
    BFSI    35,285    36,731 4.1%
    Telecom      9,440    10,436 10.5%
    Manufacturing      6,036       6,081 0.7%
    Retail       8,434       9,039 7.2%
    Hi-Tech      3,405      3,780 11.0%
    Healthcare      4,024       4,273 6.2%
    Transportation      2,476       2,547 2.9%
    Energy Utilities       2,321       2,712 16.8%
    Media & Entertainment       1,393        1,561 12.1%
    Others       4,565       5,013 9.8%
    On the basis of service offerings      
    ADM    36,833     39,361 6.9%
    Business Intelligence       4,179       4,437 6.2%
    Enterprise Solutions       7,815       8,053 3.0%
    Assurance Services       4,488       5,259 17.2%
    Engg. Industrial Services       3,714       3,944 6.2%
    Infrastructure Services       6,423       7,149 11.3%
    Global Consulting       1,935       1,726 -10.8%
    Asset Leverage Solutions      3,095      3,040 -1.8%
    BPO       8,899       9,203 3.4%
    On the basis of geography      
    North America    41,785     45,195 8.2%
    Ibero America      3,405       3,533 3.8%
    UK    11,762    12,408 5.5%
    Continental Europe      7,738       7,313 -5.5%
    India      6,887       7,231 5.0%
    Asia Pacific       4,333       4,848 11.9%
    MEA      1,470       1,643 11.8%

  • The company added a net of 3,271 employees during the quarter. The total employee base now stands at around 163,700. The attrition has increased to 13.1%. The surge in attrition is mainly on account of seasonal factors as some employees leaving for higher studies. It was also on account of better industrial growth and attrition caused by the completion of the appraisal process during the quarter.

  • TCS’ operating margins declined by 0.9% QoQ. The impact of negative currency movements was -0.3% and impact of wage hike was -2.2%. This decline was offset by a gain of 0.2% on account of shift towards offshore, 0.6% gain due to improvement in revenue productivity and gain of 1.4% due to savings in sales and administrative costs. The foreign exchange loss due to adverse currency movements was Rs 472 m.

What to expect?
At the current price of Rs 822, the stock is trading at a multiple of 15.5 times our estimated FY13 earnings. Despite the uncertain macro conditions, TCS’ management is upbeat about the future scenario. This is based on the company’s strong deal pipeline as well as its discussions with clients. TCS expects pricing to remain stable through the second quarter and expects it to increase in the second half of the year thanks to the increase in demand that is being seen across all segments. The company plans to hire 40,000 employees during the year and also plans to bring down the attrition rate by focusing on employee retention particularly for the critical talent pool. At current levels we continue to have a positive view on the stock from a 2 to 3 years perspective.

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