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TCS: Forex loss hits bottomline - Views on News from Equitymaster

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TCS: Forex loss hits bottomline
Oct 22, 2008

Performance summary
  • Net sales grow by 9% QoQ in 2QFY09, 25% YoY during the half year period.
  • Operating margins expand by 3% QoQ during the quarter, largely on account of better utilisation.
  • Profit after tax declines by 1.5% QoQ during the quarter. Growth during the first half stands at a marginal 4% YoY.
  • Adds 51 new clients and 9,682 employees during the quarter. Attrition rate stands at 13.2%.
  • Declares dividend of Rs 3 per share (dividend yield of 0.6%).

Consolidated financial snapshot
(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 64,107 69,534 8.5% 107,069 133,641 24.8%
Expenditure 49,275 51,332 4.2% 80,253 99,849 24.4%
Operating profit (EBITDA) 14,833 18,202 22.7% 26,816 33,792 26.0%
Operating profit margin (%) 23.1% 26.2%   25.0% 25.3%  
Other income 1,196 (1,689)   4,196 (1,250)  
Depreciation 1,122 1,399 24.7% 2,598 2,521 -3.0%
Interest 69 58 -17.1% 156 127 -18.4%
Profit before tax 14,838 15,057 1.5% 28,259 29,894 5.8%
Tax 1,844 2,204 19.5% 3,588 4,048 12.8%
Minority interest 88 136 54.8% 133 224 69.2%
Share of profit of associates (1) 7   (7) 6  
Profit after tax/(loss) 12,906 12,710 -1.5% 24,545 25,616 4.4%
Net profit margin (%) 20.1% 18.3%   22.9% 19.2%  
No. of shares (m)       978.5 978.5  
Diluted earnings per share (Rs)*         52.5  
P/E ratio (x)*         10.4  
* Trailing 12 months basis

What has driven performance in 2QFY09?
  • TCS grew its topline by 9% QoQ during 2QFY09. This growth was aided by increase in volumes and improvement in pricing (billing rates). Despite the ongoing financial turmoil in the US and UK, TCS’ BFSI segment remained the major revenue driver. His segment (contributes 42% of total revenue) grew by 7% QoQ during the quarter. The manufacturing, retail and telecom segments also showed decent growth during the quarter –12%, 4% and 7% QoQ respectively.

    Based on the service offerings, the company’s application development and maintenance (ADM) services recorded a growth of 14% QoQ during 2QFY09. Enterprise solution, business intelligence and assurance services witnessed growth of 4%, 4% and 6% respectively. Growth in these areas indicates TCS’ increased focus on high-end service offerings.

  • TCS’ operating margins expanded by 3% QoQ during 2QFY09. This was on account of better utilisation of resources. The company has been able to improve its utilisation rate to 81.1% from 78.3% in the previous quarter. The volume growth coupled with pricing improvement also aided the margins. The depreciation of rupee against the US dollar and pound also played their part.

  • TCS reported a 1.5% QoQ decline in net profits during 2QFY09. This was mainly on account of forex losses that the company incurred on the back of rupee’s volatile movement against the US dollar and the pound.

Performance summary
    What to expect? At the current price of Rs 544, the stock is trading at a multiple of 8.3 times our estimated FY11 earnings. The management has indicated of keeping a close watch on the external environment, especially considering the US economic situation. However, it remains confident on the business from a medium to long-term perspective. The management sees growth on account of healthy pipeline the company has at present.

    TCS is pursuing around 20 deals currently. The management expects these to be closed in the coming quarters. The management also expects to see traction in high-end services and growth in other verticals. It expects the pricing environment to remain stable during the current fiscal.

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