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TCS: Pulling the growth levers - Views on News from Equitymaster

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TCS: Pulling the growth levers
Oct 16, 2009

Performance summary
  • Net sales grow by 3% QoQ in 2QFY10, 10% YoY during the half year period.
  • Operating margins expand by 1.2% QoQ during the quarter, largely on account of better utilization, which stood at 79.5% at the end of September 2009.
  • Aided by better margins, net profit rises by 7% QoQ during the quarter. Profit growth for 1HFY10 stands at a robust 24% YoY.
  • Adds 30 new clients and 320 employees (net) during the quarter. Attrition rate stands at 11.4% at the end of 2QFY10 (as against 13.2% at the end of previous quarter).
  • Declares quarterly dividend of Rs 2 per share.

Consolidated financial snapshot
(Rs m) 1QFY10 2QFY10 Change 1HFY09 1HFY10 Change
Sales 72,070 74,352 3.2% 133,641 146,422 9.6%
Expenditure 52,422 53,173 1.4% 99,849 105,595 5.8%
Operating profit (EBITDA) 19,648 21,180 7.8% 33,792 40,827 20.8%
Operating profit margin (%) 27.3% 28.5%   25.3% 27.9%  
Other income 256 (86)   (1,250) 169  
Depreciation 1,580 1,660 5.0% 2,521 3,240 28.5%
Interest 37 35 -4.9% 127 72 -42.9%
Profit before tax 18,286 19,399 6.1% 29,894 37,685 26.1%
Tax 2,773 2,773 0.0% 4,048 5,546 37.0%
Minority interest 171 204 19.1% 224 375 67.2%
Share of profit of associates 2 -   6 2 -60.3%
Profit after tax/(loss) 15,340 16,422 7.1% 25,616 31,762 24.0%
Net profit margin (%) 21.3% 22.1%   19.2% 21.7%  
No. of shares (m)       978.5 1,957.6  
Diluted earnings per share (Rs)*         30.0  
P/E ratio (x)*         20.0  
* Trailing 12 months basis

What has driven performance in 2QFY10?
  • TCS grew its topline by 3% QoQ during 2QFY10. This was aided by a 5% QoQ increase in volumes particularly in the international business. Amidst some early signs of easing of the financial slowdown, TCS’ BFSI (banking, financial services and insurance) segment remained the major revenue driver. While contributing 45% to total revenue, this segment grew by 6% QoQ during the quarter. The retail (12% of total revenues), healthcare (6%) and energy & utilities (3%) segments also showed decent growth. However, performance in the manufacturing, telecom and hi-tech segments continued to remain muted. Nevertheless, the management believes that the worst is over for these segments which are recovering slowly from the global downturn.

  • Based on service offerings, TCS’ application development and maintenance (ADM) services (contributes around 50% to total sales) recorded a growth of 5% QoQ during 2QFY10. Global consultancy, BPO and assurance services also saw significant traction owing to TCS’ ability to cross-sell its services trough its global delivery model. However enterprise solution, business intelligence and infrastructure services witnessed declines of 3%, 4% and 11% respectively mainly on account of pending budget decisions by clients. IP-led solutions like BaNCS (banking solution) registered traction.

  • In terms of client geography, about 58% of TCS’ sales came from the American region. The company registered decent traction in Continental Europe, Asia Pacific and Middle Eastern geographies. Business from the UK and India remained weak owing to slowdown in demand. Revenues from India, for instance, declined by 18% QoQ during 2QFY10.

    Revenue Break up
    (In Rs m) 1QFY10 2QFY10 Change
    On the basis of industry verticals      
    BFSI 31,639 33,459 6%
    Telecom 9,081 8,922 -2%
    Manufacturing 6,630 6,469 -2%
    Retail 8,793 8,922 1%
    Hi-Tech 3,531 3,569 1%
    Healthcare 4,108 4,461 9%
    Transportation 2,667 2,602 -2%
    Energy & Utilities 1,946 2,082 7%
    Media & Entertainment 1,586 1,636 3%
    Others 2,090 2,231 7%
    On the basis of service offerings      
    ADM 35,098 36,879 5.1%
    Business Intelligence 4,396 4,238 -3.6%
    Enterprise Solutions 7,856 7,658 -2.5%
    Assurance Services 3,171 3,569 12.5%
    Engg. & Industrial Services 3,748 3,718 -0.8%
    Infrastructure Services 6,703 5,948 -11.3%
    Global Consulting 1,009 1,190 17.9%
    Asset Leverage Solutions 1,874 2,379 27.0%
    BPO 8,216 8,774 6.8%
    On the basis of geography      
    North America 36,828 39,704 7.8%
    Ibero America 2,955 3,718 25.8%
    UK 14,054 12,268 -12.7%
    Continental Europe 7,279 7,881 8.3%
    India 6,270 5,428 -13.4%
    Asia Pacific 3,531 3,941 11.6%
    MEA 1,153 1,413 22.5%

  • TCS added a net of 312 employees during the quarter. Amongst the Indian IT majors, TCS has the largest employee base which stood at 123,092 employees at the end of September 2009. An improved employee utilization (excluding trainees) rate of around 80% boosted TCS’ operating margins. At the end of 2QFY10, TCS had 896 active clients.

  • TCS’ operating margins expanded by 1.2% QoQ during 2QFY10. This was on account of better utilization of resources. The company has been able to improve its utilization rate to 81.1% from 78.3% in the previous quarter. The volume growth coupled with better offshore-onsite mix and cost containment measures aided the margins. Foreign exchange volatility remained a concern during the quarter. Going forward, we expect the company’s margins to decline as it plans to ramp up employee-base and also award variable pay to eligible employees.

  • On account of increase in volume and better operational efficiency, TCS reported a 7.1% QoQ growth in net profits during 2QFY10.

What to expect?
At the current price of Rs 600, the stock is trading at a multiple of 14.3 times our estimated FY12 earnings. Satisfied with the company’s quarterly performance, the management during the conference call attributed the growth to improvements in market conditions coupled with its own superior operations management.

TCS’ focus on emerging economies and service-offerings aided in maintaining robust topline despite global downturn. Believing that a slow but steady recovery has started to take shape, TCS’ management find its well-diversified service portfolio and global foot-print well poised to take advantage of the emerging opportunities. However, the management enlists forex volatility as a major concern going forward and commits itself to watch it very keenly.

We believe that the company’s stellar performance reinforces the signs of recovery seen in the IT market. We have a ‘Buy’ view on the stock from a 2 to 3 years perspective

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