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TCS: A strong start to FY15
Jul 17, 2014

India's largest software firm, Tata Consultancy Services (TCS) has announced its first quarter results for financial year 2014-2015 (1QFY15). The company reported a 2.6% quarter-on-quarter (QoQ) growth in its consolidated sales and a 3.9% QoQ increase in its consolidated net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 2.6% QoQ in 1QFY15. Sales growth in US dollar terms was 5.5% QoQ. This is the highest sequential growth in US dollar terms in the last 12 quarters.
  • The operating margin fell by 2.3% QoQ to 28.7% during the quarter as compared to 31% seen during the previous quarter (4QFY14). On an absolute basis, the operating profits fell 5% QoQ. This was due to a faster sequential growth in operating costs compared to the growth in sales.
  • The other income saw a growth of 9.2% QoQ and came in at Rs 7,870 m for the quarter.
  • The profit before tax (PBT) grew by 2.6% QoQ due to an exceptional gain of Rs 4,900 m in the quarter.
  • The tax rate for the quarter stood at 22.2% compared to 23% in the previous quarter. The net profit came in at Rs 55,680 m. This was higher by 3.9% QoQ.
  • The company has declared a dividend of Rs 45 per share. This includes a special dividend Rs 40 on the completion of 10 years since its IPO.

Consolidated Financial Snapshot
(Rs m) 4QFY14 1QFY15 Change
Sales 215,511 221,110 2.6%
Expenditure 148,621 157,580 6.0%
Operating profit (EBITDA) 66,890 63,530 -5.0%
Operating profit margin (%) 31.0% 28.7%  
Other income 7,209 7,870 9.2%
Finance Costs 121   90 -25.3%
Depreciation 3,749 4,170 11.2%
Exceptional Items - 4,900  
Profit before tax 70,229 72,040 2.6%
Tax 16,133 15,990 -0.9%
Minority Interest 520 370 -28.9%
Profit after tax/(loss) 53,576 55,680 3.9%
Net profit margin (%) 24.9% 25.2%  
No. of shares   1,958.7  
Diluted earnings per share (Rs)*   106.7  
P/E ratio (x)*   23.0  
*On a trailing 12 months basis

What has driven the performance in 1QFY15?
  • In terms of industry verticals, the company witnessed broad based growth in all segments except BFSI. The BFSI segment was temporarily impacted this quarter due to large US based insurance companies ramping down software contracts. However, the other verticals more than made up for this shortfall.

  • In terms of service offerings, good growth was seen in Assurance Services, Enterprise Services and Infrastructure Services. However, Engineering Services and Asset Leveraged Solutions disappointed in this quarter.

  • In terms of geographical segments, growth was broad based with the exception of the Middle East and Africa. The pickup in revenues from India was also a positive.

    Revenue Breakup
    (Rs m) 4QFY14 1QFY15 Change
    On the basis of industry verticals
    BFSI 92,454 92,203 -0.3%
    Telecom 20,043 20,784 3.7%
    Manufacturing 18,534 19,015 2.6%
    Retail & Distribution 29,094 30,513 4.9%
    Hi-Tech 11,422 12,161 6.5%
    Life Sciences & Healthcare 13,146 13,930 6.0%
    Travel & Hospitality 7,543 7,960 5.5%
    Energy & Utilities 8,189 8,623 5.3%
    Media & Entertainment 5,603 5,970 6.5%
    Others 9,482 9,950 4.9%
    On the basis of service offerings
    Application Development & Maintenance 88,359 90,213 2.1%
    Enterprise Solutions and Business Intelligence 33,835 35,156 3.9%
    Assurance Services 18,103 19,015 5.0%
    Engineering & Industrial Services 10,345 9,950 -3.8%
    Infrastructure Services 25,861 27,860 7.7%
    Global Consulting 7,327 7,076 -3.4%
    Asset Leverage Solutions 5,603 5,528 -1.3%
    BPO 26,077 26,312 0.9%
    On the basis of geography
    North America 112,497 115,419 2.6%
    Latin America 4,741 4,864 2.6%
    UK 38,361 39,136 2.0%
    Continental Europe 26,077 26,533 1.8%
    India 13,362 13,930 4.3%
    Asia Pacific 15,948 16,804 5.4%
    MEA 4,526 4,422 -2.3%

  • In terms of operational performance, it was a mixed bag for the company. The impact of wage hikes was partially offset by the increase in employee utillisation. Despite the increase in productivity, the operating profits fell 5% QoQ. The operating margin came in at 28.7% compared to 31% seen in the last quarter.
  • At the net level, the 11.2% QoQ increase in depreciation impacted the bottomline. The new companies act which has come into effect required changes in the depreciation policy of the company’s useful assets. However this also had a positive impact to the tune of Rs 4,900 m in the form of an extraordinary gain due to tax write backs. The net profit thus increased by 3.9% QoQ.
What to expect?
At of the current price of Rs 2,450 the stock of TCS is trading at a trailing twelve months (TTM) price/earnings (P/E) multiple of 23 times.

TCS has delivered a strong performance in the quarter on the back of an exceptional topline performance. The 5.5% growth in US dollar revenues was the second highest quarterly sequential growth in the company’s history, since they began reporting this number. However, it must be pointed out that the June quarter is traditionally the strongest quarter of the year for Indian IT firms. Thus it would not be appropriate to expect such a stupendous quarterly growth to be sustained.

However, the company’s deal pipeline remains firmly intact and new client additions continue at a healthy pace. Client additions in the US$ 20m and US$ 50 m categories were 8 and 5 respectively during the quarter. It is heartening that growth is being witnessed across verticals, service lines and geographies.

The company continues to invest heavily in sales and marketing efforts to drive growth. These investments as well the rupee appreciation will ensure that the operating margins will be below 30% this year. However, it is well within the management’s comfort zone.

TCS is increasingly relying on new digital technologies to drive growth. Such contracts may be smaller but they have a significantly higher margin profile. The company currently does not report revenues from these services as a separate service line yet but the management has stated that they will do so in the future as and when these services start to contribute a higher portion of revenues.

The fundamentals of TCS remain strong and the company has good long term prospects. However at current levels the valuations of the stock are stretched. Therefore we recommend that investors do not buy the stock at these levels.

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