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TCS: Muted pricing hurts margins
Jul 16, 2008

Introduction to results
  • Net sales grow by 5.1% QoQ in 1QFY09.
  • EBITDA margins contract by 3% QoQ during the quarter, largely on account of higher salary and visa costs.
  • Profit after tax rises by 4% QoQ during the quarter; growth aided by lower depreciation and tax expenses.
  • Adds 35 new clients and 8,982 employees during the quarter. Attrition rate stood at 12.8%.
  • Declares dividend of Rs 3 per share (dividend yield of 0.4%).


Consolidated financial snapshot
(Rs m) 4QFY08 1QFY09 Change
Sales 60,978 64,107 5.1%
Expenditure 45,297 49,275 8.8%
Operating profit (EBITDA) 15,681 14,833 -5.4%
Operating profit margin (%) 25.7% 23.1%
Other income 833 1,196 43.6%
Depreciation 1,598 1,122 -29.8%
Interest 69 69 0.9%
Profit before tax 14,847 14,838 -0.1%
Tax 2,275 1,844 -18.9%
Minority interest 123 88 -28.3%
Share of profit of associates (1) (1) 0.0%
Profit after tax/(loss) 12,448 12,904 3.7%
Net profit margin (%) 20.4% 20.1%
No. of shares (m) 978.6
Diluted earnings per share (Rs) 52.3
P/E ratio (x) 13.9

What has driven performance in 1QFY09?
  • TCS grew its topline by 5% during 1QFY09 aided by its North America, the UK and Europe markets, which collectively grew by 8% QoQ. However, the company recorded some decline in business from Latin America and India. The management has indicated that it has seen slow ramp up in a couple of projects in the financial services space. This has impacted the company’s 1QFY09 performance to a certain extent. The management expects these clients to ramp up over the next few quarters.

    Based on industry verticals, manufacturing was the lead performer, raking in sales growth of 14% QoQ during 1QFY09. This was followed by the retail vertical where sales grew by 10% QoQ. As for service offerings, the company’s application development and maintenance (ADM) services recorded a growth of 7% QoQ. Infrastructure services and engineering & industrial services witnessed growth of 21% and 11% respectively. Growth in these areas indicates that company is able to grow its high-end service offerings.

  • TCS’ operating margins contracted by 2.6% QoQ during 1QFY09. The management indicated during the conference call that although company has managed to reduce its SG &A expenses, higher wage cost and pricing has negatively impacted margins. The pressure was however pared to some extent on account of rupee’s depreciation against the US dollar.

  • TCS reported a 4% QoQ growth in net profits during 1QFY09. This growth was mainly aided by lower tax and depreciation expense and higher other income. The company added 8,982 employees (gross) in this quarter and the attrition rate stood at 12.8% with 12.1% attrition rate in IT services and 20.5% attrition rate in BPO.

What to expect?
At the current price of Rs 726, the stock is trading at a multiple of 10.7 times our estimated FY10 earnings. While the management has indicated of keeping a close watch on the external environment, especially considering the US economic situation, it remains confident of the offshoring momentum from a medium to long-term perspective. The management also expects to see traction in high-end services. It expects the pricing environment to remain stable during the current fiscal.

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