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TCS: Improved profitability amidst turbulence - Views on News from Equitymaster
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TCS: Improved profitability amidst turbulence
Jul 17, 2009

Performance summary
  • Sales grow by just around 0.5% QoQ (quarter on quarter) during 1QFY10. Revenues from providing software services to the banking, financial services & insurance (BFSI) industry grew by 3% QoQ during the quarter, while those from the hi-tech sector dropped by 10% QoQ. Revenues from the telecom and manufacturing industries declined by 3% and 6% respectively during the quarter.
  • Operating margins expand by 1.5% QoQ, largely on the back of a jump in utilisation levels. Utilisation (including trainees) rises from 69.4% in 4QFY09 to 71.3% in 1QFY10.
  • Employee base declines by around 2,100 signifying the demand constraint that the IT sector has been facing for the past few quarters.
  • Profit after tax rises 15% QoQ during the quarter, largely led by improvement in operating margins and higher other income.

Consolidated financial performance
(Rs m) 4QFY09 1QFY10 Change
Sales 71,720 72,070 0.5%
Expenditure 53,250 52,422 -1.6%
Operating profit (EBITDA) 18,470 19,648 6.4%
Operating profit margin (%) 25.8% 27.3%  
Other income (1,300) 256  
Depreciation 1,650 1,580 -4.2%
Interest 60 37 -38.2%
Profit before tax 15,460 18,286 18.3%
Tax 1,940 2,773 42.9%
Minority interest 190 171 -9.9%
Share of profit of associates - 2  
Profit after tax/(loss) 13,330 15,340 15.1%
Net profit margin (%) 18.6% 21.3%  
No. of shares (m) 978.7 1,957.9  
Diluted earnings per share (Rs)*   27.9  
P/E ratio (x)*   15.6  
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • TCS grew its topline by 0.5% during 1QFY10 aided by its UK and Europe, India and Asia Pacific markets, which collectively grew by 11% QoQ. However, the company recorded some pressure in business from North and Latin America and Continental Europe. It added 26 new clients in the quarter and saw some improvement in customer sentiment as they become more open to pricing related negotiations and signaled stability in IT budgets. TCS derived 99.7% of its revenue from repeat business and won 8 large multi-year, multi-million deals from clients spread across geographies and industry verticals. The pricing environment remained subdued with billing rates declining by just 0.25%.

    Industry-wise revenue breakup
    (percentage of sales) 4QFY09 1QFY10 Change
    BFSI 30,696 31,639 3%
    Telecom 9,395 9,081 -3%
    Manufacturing 7,029 6,630 -6%
    Retail 8,606 8,793 2%
    Hi-Tech 3,945 3,531 -10%
    Healthcare 4,088 4,108 0%
    Transportation 2,725 2,667 -2%
    Energy & Utilities 1,936 1,946 0%
    Media and entertainment 1,506 1,586 5%
    Others 1,793 2,090 17%
    Source: Company

  • Based on industry verticals, contrary to the expectations given the financial crisis, banking and financial services (BFS) remained the lead performer for TCS, contributing 43.9% to sales during 1QFY10. The company also saw decent traction in retail, healthcare and media segments. However, the performance of manufacturing, telecom and hi-tech verticals showed no signs of recovery.

  • As for service offerings, the company’s application development and maintenance (ADM) services grew about 1% QoQ, contributing the maximum of 48.7% to sales in 1QFY10. Other services like assurance and BPO grew by 4% and 11% respectively. TCS’s high-end services like Business Intelligence, Enterprise Solutions, Infrastructure management and Consulting saw a decline of 4% QoQ as clients rationalised discretionary IT budgets and restricted high-end spending to upgrades and consolidation projects.

    Service-wise revenue breakup
    (percentage of sales) 4QFY09 1QFY10 Change
    ADM 34,856 35,098 0.7%
    Business Intelligence 4,877 4,396 -9.9%
    Enterprise Solutions 8,463 7,856 -7.2%
    Assurance Services 2,725 3,171 16.4%
    Engg. & Industrial Services 4,160 3,748 -9.9%
    Infra. Services 5,953 6,703 12.6%
    Global Consulting 1,219 1,009 -17.2%
    Asset Leverage Solutions 1,506 1,874 24.4%
    BPO 7,961 8,216 3.2%
    Source: Company

  • TCS’ operating margins expanded by 1.5% QoQ during 1QFY10. This can be credited to containment of sales and general expense and better utilisation levels, aided by a push towards offshoring which accounted for 50.4% of revenues in 1QFY10 as against 47.7% in the last quarter. The company also reduced its employee cost on back of lower recruitment and training expenses. Margins were also aided by favorable cross-currency movements.

  • TCS reported a 15.7% QoQ growth in net profits during 1QFY10. This was mainly aided by better operating margins, increased volumes and higher other income. The company added 1,154 employees (gross) in this quarter and the attrition rate stood at 11.5% with 10.7% attrition rate in IT services and 19.8% attrition rate in BPO.

What to expect?
At the current price of Rs 434, the stock is trading at a multiple of 11.5 times our estimated FY12 earnings. While the company’s management remains cautious of the external environment, especially considering the slow rate of recovery in the US and European markets, it is confident of the offshoring momentum from a medium to long-term perspective. The management also expects to see traction in the domestic market which contributed around 9% of the quarter’s revenue registering a QoQ growth of around 7%. The company aims to double revenues from the domestic market in the next couple of years. It expects the pricing environment to remain subdued during the current fiscal. Based on strong fundamentals and the company’s distinct value proposition, we continue to maintain our positive outlook towards the stock from long-term perspective.

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