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TCS: Volume growth drives stellar performance
Oct 22, 2010

TCS has announced its 2QFY11 results. Its sales grew by 13% QoQ while net profits were up 14%QoQ during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales grew by 13% QoQ in 2QFY11, largely driven by 11% growth in volumes. This was driven by growth in sales from all geographies.
  • Operating margins improve by 0.6% QoQ to 29.9%.
  • The company adds a net of 10,717 employees during the quarter. Attrition rate continues to be high at 14.1%, as compared to 13.1% at the end of the previous quarter (1QFY11).
  • Net profit grows by 14% QoQ during the quarter. This is was driven by the revenue growth which offset the negative impact of lower other income as well as higher interest costs.
  • Adds 30 new clients during the quarter. The total number of active clients as at the end of the quarter was 936.
  • Declares an interim dividend of Rs 2 per share (yield of 0.2%).


Consolidated financial snapshot
(Rs m) 1QFY11 2QFY11 Change 1HFY10 1HFY11 Change
Sales 82,173 92,864 13.0% 146,422 175,037 19.5%
Expenditure 58,078 65,102 12.1% 105,595 123,180 16.7%
Operating profit (EBITDA) 24,095 27,762 15.2% 40,827 51,857 27.0%
Operating profit margin (%) 29.3% 29.9%   27.9% 29.6%  
Other income 955 708 -25.9% 169 1,662 882.3%
Depreciation 1,615 1,725 6.8% 3,240 3,340 3.1%
Interest 27 153 470.1% 72.4 180 148.1%
Profit before tax 23,408 26,592 13.6% 37,685 49,999 32.7%
Tax 4,028 4,601 14.2% 5,546 8,629 55.6%
Minority interest 316 298 -5.5% 374.9 614 63.8%
Share of profit of associates 3 -     2.3 3 30.4%
Profit after tax/(loss) 19,061 21,692 13.8% 31,762 40,753 28.3%
Net profit margin (%) 23.2% 23.4%   21.7% 23.3%  
No. of shares (m)       1,957.6 1,957.1  
Diluted EPS (Rs)*         40.4  
P/E*         25.6  
* On a trailing 12 months basis

What has driven performance in 2QFY11?
  • TCS grew its topline on the back of a robust volume growth of 11% QoQ during 2QFY11. The double digit growth in volumes was driven by a growth in demand from all geographies. Revenues from Europe bounced back to record a growth of 16% QoQ during the quarter. North America, India, and Asia Pacific regions supported the growth with 10%, 27%, and 19% QoQ growth in sales respectively. Going forward, TCS expects growth across all its geographies. However, the management has still added caution on the global macro-economic environment.

  • In terms of industry verticals, TCS saw a robust growth across all its key verticals. The major drivers were the ‘energy & utilities’, ‘media & entertainment’ and ‘transportation’ verticals. These grew by 47% QoQ, 19% QoQ and 17% QoQ respectively. The bread and butter business of the company – banking and financial services (BFSI) - (44% of total sales) witnessed a healthy growth of 11% QoQ during the quarter.

  • In terms of service offerings, the 'Infrastructure Services’' and 'Enterprise Solutions' registered growth of 22% QoQ and 19% QoQ respectively. The main service offering of ADM (application development and maintenance) clocked a healthy growth of 10% QoQ during the quarter. The higher-end offering segment of 'Global Consulting' witnessed a robust growth of 13% QoQ in sales. This indicates a revival in discretionary spending by clients.

    Revenue Breakup
    (Rs m) 1QFY11 2QFY11 Change
    On the basis of industry verticals      
    BFSI 36,731 40,860 11.2%
    Telecom 10,436 11,887 13.9%
    Manufacturing 6,081 6,872 13.0%
    Retail 9,039 10,122 12.0%
    Hi-Tech 3,780 4,272 13.0%
    Healthcare 4,273 4,736 10.8%
    Transportation 2,547 2,972 16.7%
    Energy & Utilities 2,712 3,993 47.3%
    Media & Entertainment 1,561 1,857 19.0%
    Others 5,013 5,293 5.6%
    On the basis of service offerings      
    ADM 39,361 43,460 10.4%
    Business Intelligence 4,437 5,200 17.2%
    Enterprise Solutions 8,053 9,565 18.8%
    Assurance Services 5,259 6,129 16.5%
    Engg. & Industrial Services 3,944 4,550 15.4%
    Infrastructure Services 7,149 8,729 22.1%
    Global Consulting 1,726 1,950 13.0%
    Asset Leverage Solutions 3,040 3,157 3.8%
    BPO 9,203 10,122 10.0%
    On the basis of geography      
    North America 45,195 49,868 10.3%
    Ibero America 3,533 3,622 2.5%
    UK 12,408 14,208 14.5%
    Continental Europe 7,313 8,451 15.6%
    India 7,231 9,194 27.1%
    Asia Pacific 4,848 5,758 18.8%
    MEA 1,643 1,764 7.4%
    Source: Company

  • TCS added a net of 10,717 employees during the quarter. The total employee base now stands at around 174,417. The attrition has increased to 14.1%. The management has indicated that it is trying to put measures in place to control the rising attrition. However, high attrition appears to be a bugbear for the entire IT industry and also indicates a revival in industry growth.

  • TCS’ operating margins increased by 0.6% QoQ. The positive impact of currency movements was 1%, impact of promotions and variable payouts made during the quarter was -1.7%, improvement of rate efficiency was 0.9% and savings on the SG&A side contributed 0.04% towards the operating margins.

  • The other income declined by 26% QoQ during the quarter mainly on account of currency losses. Total exchange loss during the quarter was Rs 537 m.

What to expect?
At the current price of Rs 1,034, the stock is trading at a multiple of 19.8 times our estimated FY13 earnings. The management is upbeat about demand environment. This is based on its discussions with clients. In smaller companies, the deals are more integrated in nature while in larger companies the deals are more service oriented. The demand is fuelled from the clients’ need to grow as well as to improve efficiency. On the pricing front, the management is still optimistic that pricing would improve in the second half of the year.

The key concerns for TCS are high attrition as well as currency volatility. Other concerns are regulatory issues in some of the countries especially US as well as the need to have the agility to capture and meet the opportunities on the demand side. The company plans to hire 40,000 employees during the year and also plans to bring down the attrition rate by focusing on employee retention particularly for the critical talent pool.

At the current levels we continue to have a ‘Hold’ view on the stock from a 2 to 3 years perspective.

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