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TCS: Growth momentum continues
Oct 16, 2014 | Updated on Oct 17, 2014

India's largest software firm, Tata Consultancy Services (TCS) has announced its second quarter results for financial year 2014-2015 (2QFY15). The company reported a 7.7% quarter-on-quarter (QoQ) growth in its consolidated sales and a 5.8% QoQ decrease in its consolidated net profits. Here is our analysis of the results.

Performance summary
  • Net sales grew by 7.7% QoQ in 2QFY15. Sales growth in US dollar terms was an exceptional 6.4% QoQ.
  • The operating margin fell marginally by 0.1% QoQ to 28.6% during the quarter as compared to 28.7% seen during the previous quarter (1QFY15). On an absolute basis, the operating profits grew 7% QoQ.
  • The other income saw a fall of 15.8% QoQ and came in at Rs 6,626 m for the quarter.
  • The net profit came in at Rs 52,443 m. This was lower by 5.8% QoQ. However, the company had recorded an exceptional income of Rs 4,900 m in the previous quarter. Thus accounting for the same, the net profit was up by 3.3% QoQ.
  • The company has declared an interim dividend of Rs 5 per share.
  • The company has also announced the amalgamation of CMC with itself.

Consolidated Financial Snapshot
(Rs m) 1QFY15 2QFY15 Change 1HFY14 1HFY15 Change
Sales 221,110 238,165 7.7% 389,643 459,275 17.9%
Expenditure 157,585 170,161 8.0% 271,872 327,746 20.6%
Operating profit (EBITDA) 63,526 68,004 7.0% 117,771 131,530 11.7%
Operating profit margin (%) 28.7% 28.6%   30.2% 28.6%  
Other income 7,872 6,626 -15.8% 2,328 14,498 522.8%
Finance Costs 87 665 666.9% 194 752 287.0%
Depreciation 4,175 4,492 7.6% 6,250 8,667 38.7%
Exceptional Items 4,898 -   - 4,898  
Profit before tax 72,033 69,473 -3.6% 113,654 141,506 24.5%
Tax 15,987 16,351 2.3% 28,205 32,337 14.7%
Minority Interest 370 680 84.0% 721 1,050 45.6%
Profit after tax/(loss) 55,677 52,443 -5.8% 84,728 108,120 27.6%
Net profit margin (%) 25.2% 22.0%   21.7% 23.5%  
No. of shares         1,959  
Diluted earnings per share (Rs)*         109.8  
P/E ratio (x)*         22.5  
*On a trailing 12 months basis

What has driven the performance in 2QFY15?
  • In terms of industry verticals, service lines and geographies growth remained broad based. Manufacturing and the Energy verticals continued to show good growth. The Infrastructure Management Services (IMS) also remained strong in the quarter. While the Asia Pacific region witnessed a huge jump in revenues sequentially. The Latin American region witnessed de-growth.

    Revenue Breakup
    On the basis of industry verticals
    (Rs m) 1QFY15 2QFY15 Change
    BFSI 92,203 96,219 4.4%
    Telecom 20,784 21,197 2.0%
    Manufacturing 19,015 24,055 26.5%
    Retail & Distribution 30,513 32,152 5.4%
    Hi-Tech 12,161 13,575 11.6%
    Life Sciences & Healthcare 13,930 15,004 7.7%
    Travel & Hospitality 7,960 8,336 4.7%
    Energy & Utilities 8,623 10,241 18.8%
    Media & Entertainment 5,970 6,430 7.7%
    Others 9,950 10,956 10.1%
    On the basis of service offerings
    Application Development & Maintenance 90,213 96,457 6.9%
    Enterprise Solutions and Business Intelligence 35,156 37,154 5.7%
    Assurance Services 19,015 20,006 5.2%
    Engineering & Industrial Services 9,950 10,956 10.1%
    Infrastructure Services 27,860 32,867 18.0%
    Global Consulting 7,076 7,621 7.7%
    Asset Leverage Solutions 5,528 5,478 -0.9%
    BPO 26,312 27,627 5.0%
    On the basis of geography
    North America 115,419 121,464 5.2%
    Latin America 4,864 4,525 -7.0%
    UK 39,136 40,726 4.1%
    Continental Europe 26,533 27,389 3.2%
    India 13,930 15,481 11.1%
    Asia Pacific 16,804 24,055 43.1%
    MEA 4,422 4,525 2.3%

  • In terms of operational performance, the company's employee utillisation reached an all time high of 86.2% (excluding trainees). The operating performance was impacted slightly due to the integration of ITF of Japan. However, this was made up by improved productivity and strong volume growth of 6.1% QoQ.

  • At the net level, the consolidated bottomline fell by 5.8% QoQ. However, this is not a cause of concern at all. The company had enjoyed a one-time tax write back in 1QFY15 due to the adoption of the new companies act. Without that benefit in 2QFY15, the bottomline was lower than in 1QFY15.
What to expect?
At of the current price of Rs 2,474 the stock of TCS is trading at a trailing twelve months (TTM) price/earnings (P/E) multiple of 22.5 times.

TCS had a good quarter in 2QFY15. Volume growth continues to remain strong. The company is not facing any pricing pressures. The deal momentum also remains healthy. TCS continued to win software contracts across the client spectrum from all parts of the world. However, the management has stated that North America remains the main growth driver.

Operationally the management has maintained its outlook of holding operating margins between 26-28% in the long term. The company's margins are currently above this band. Increasing employee productivity has held the company in good stead despite the huge employee base of 3,13,757 at the end of 2QFY15.

The management has stated that the CMC amalgamation, if approved by shareholders, will not have much of a financial impact immediately as the company is already a subsidiary of TCS. However, the long term impact will be positive as the companies share synergies in the local market in India.

The fundamentals of TCS remain strong and the company has solid long term prospects. However, at current levels the valuations of the stock are stretched. Therefore, we maintain our hold view on the stock.

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