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TCS: Revenues gain but profits drain
Jul 15, 2011

TCS  has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 6.3% QoQ growth in sales and a 7.9% QoQ decline in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 6.3% QoQ in 1QFY12, largely driven by 7.5% growth in volumes.
  • Operating margins declined by 2.4% QoQ to 28.1% during the quarter as compared to 30.5% seen during the previous quarter (ending March 2011). This was mainly due to higher cost of sales (as a percentage of sales). The increase was on account of higher employee related costs during the year. TCS had announced salary increases in the range of 10-12% for its employees during the quarter.
  • Added a net of around 3,576 employees during the quarter. Attrition rate currently stands at 14.8%, marginally higher than the 14.4% seen during the previous quarter (4QFY11).
  • Net profit declined by 7.9% QoQ during the quarter. This was mainly on account of higher interest expenses and lower operating margins during the quarter.
  • The company added 24 new clients during the quarter. The total number of active clients at the end of the quarter was 959.
  • Proposed an interim dividend of Rs 3 per share (yield of 0.3%).   


 Consolidated financial snapshot
(Rs m) 4QFY11 1QFY12 Change
Sales 101,570 107,970 6.3%
Expenditure 70,640 77,642 9.9%
Operating profit (EBITDA) 30,930 30,329 -1.9%
Operating profit margin (%) 30.5% 28.1%  
Other income 2,430 2,941 21.0%
Depreciation 2,130 2,079 -2.4%
Interest 30 47 57.3%
Profit before tax 31,200 31,143 -0.2%
Tax 4,640 6,739 45.2%
Minority interest 330 257 -22.0%
Share of profit of associates      
Profit after tax/(loss) 26,230 24,148 -7.9%
Net profit margin (%) 25.8% 22.4%  
No. of shares (m) 1,957.2 1,957.2  
Diluted EPS (Rs)*   48.9  
P/E*   23.6  
* On a trailing 12 months basis

What has driven performance in 1QFY12?
  • TCS grew its topline by 6.3% QoQ. This was on the back of a volume growth of nearly 7.5% during the quarter. Revenues from every geographic concentration witnessed an increase during the quarter. Revenues from Middle East and Africa (MEA) and India clocked in the best performance and grew by 16.9% QoQ and 12.3% QoQ respectively. The Asia-Pacific and Continental Europe markets recorded a growth of 7.8% QoQ and 6.3% QoQ respectively during the quarter. Revenues from the North America and United Kigdom (UK) continued their upward trend and recorded a growth of 5.3% QoQ and 4.9% QoQ respectively during the quarter. Revenues from Latin America also witnessed a growth of 3.0% QoQ.
  • In terms of industry verticals, TCS saw a robust growth across almost all its key verticals except for the ‘Energy & Utilities' vertical, which witnessed a decline of 12.2% QoQ. The major drivers were the ‘hi-tech', ‘telecom', ‘retail and ‘manufacturing' verticals. These grew by 14.2% QoQ, 13.1% QoQ, 10.1% QoQ and 7.7% QoQ respectively. The key segment of the company - banking and financial services (BFSI) - (43% of total sales) witnessed a decent growth of 4.6% QoQ during the quarter.  
  • In terms of service offerings, the main service offering of ADM (application development and maintenance) clocked a robust growth of 6.5% QoQ during the quarter. The ‘Global Consulting', ‘Infrastructure services' and ‘Assurance Services' drove the growth for the company and recorded an increase of 11.4% QoQ, 11.0% QoQ and 10.9% QoQ. However, the ‘Business Process Outsourcing' or the BPO division witnessed a lackluster quarter and recorded a decline of 0.1% QoQ.   

 

Revenue Breakup
(Rs m) 4QFY11 1QFY12 Change
On the basis of industry verticals      
BFSI 44,691 46,751 4.6%
Telecom 11,173 12,633 13.1%
Manufacturing 7,618 8,206 7.7%
Retail 11,376 12,525 10.1%
Hi-Tech 5,485 6,262 14.2%
Healthcare 5,383 5,614 4.3%
Transportation 3,961 3,995 0.8%
Energy & Utilities 4,672 4,103 -12.2%
Media & Entertainment 2,336 2,375 1.7%
Others 4,875 5,506 12.9%
On the basis of service offerings      
ADM 46,824 49,882 6.5%
Business Intelligence 4,977 5,291 6.3%
Enterprise Solutions 10,970 11,661 6.3%
Assurance Services 7,110 7,882 10.9%
Engg. & Industrial Services 4,875 4,967 1.9%
Infrastructure Services 9,243 10,257 11.0%
Global Consulting 2,133 2,375 11.4%
Asset Leverage Solutions 3,657 3,887 6.3%
BPO 11,782 11,769 -0.1%
On the basis of geography      
North America 54,238 57,116 5.3%
Ibero America 3,250 3,347 3.0%
UK 15,743 16,519 4.9%
Continental Europe 10,055 10,689 6.3%
India 8,938 10,041 12.3%
Asia Pacific 7,313 7,882 7.8%
MEA 2,031 2,375 16.9%
Source:Company
  • TCS added a net of around 3,576 employees during the quarter. The total employee base now stands at around 202,190. The attrition increased marginally to 14.8% during the quarter. This is slightly higher than the 14.4% seen during the previous quarter (ending March 2011). The increase is despite the salary hikes given by the company to its employees.
  • TCS' operating margins declined by 2.4% QoQ during the quarter.  This was mainly due to slightly lower cost of sales (as a percentage of sales). This increase in turn was on account of higher employee related expenses. The company has given salary hikes in the range of 10-12% to its employees during the quarter.
  • Net profits declined by 7.9% QoQ. This was on account of higher interest costs which rose by 57% QoQ during the quarter. This combined with lower operating margins offset the positive impact of higher other income during the quarter. The net profits were also lower on account of higher tax expenses. Effective tax rate stood at 21.6% as compared to 14.9% seen during the previous quarter (4QFY11)
What to expect?

At the current price of Rs 1,154, the stock is trading at a multiple of 17.1 times our estimated FY14 earnings. (ResearchPro subscribers, kindly click here). 

This quarter witnessed another strong performance by the Company. The growth in revenues was largely driven by the volumes across all major business segments and operating regions. As per the management, pricing was stable during the quarter.

The management has clearly stated that the uncertainty in global environment will continue to boost the demand for services in the near future. This is particularly so for the BFSI segment. The management is also upbeat about the demand for the telecom vertical. This is expected to be driven by the growth in telecom sector especially in the emerging markets.  

On the pricing front, the management remains optimistic.  They expect pricing to see an uptick by the end of this financial year. They are quite hopeful that they would be able to close at least some of the deals at a higher pricing level.  

On the margin front, the higher employee costs resulting from the wage hike would dampen the operating margins. However, the management plans to use all the levers such as pricing, utilization, off-shoring, employee pyramid, control on selling, general and administration costs for margin expansion in the coming quarter. The company also maintained its guidance for employee addition and plans to hire 17,000-20,000 employees during the next quarter. The yearend target is 60,000 employee additions.

The company had good employee utilization level of 83.2% (excluding trainees) during the quarter. The management expects that the Company will continue to have good employee utilization (excluding trainee) level going forward. . However, they mentioned that the employee utilization (including trainees) may go down in the coming quarters as more trainees would be hired into the system.

Looking at the strong performance during the first quarter, the management ability to capture growth opportunity in the uncertain global demand environment and expectation of price uptick by the year-end, we continue to maintain our ‘Hold’ view on the stock.

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