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TCS: An Indian MNC - Outside View
 
 
TCS: An Indian MNC

Dividends galore

The new CEO Mr N Chandrasekaran's maiden effort at communicating to the shareholders through the annual report pumps up the adrenaline. All systems go, and raring to go, is the tenor of the message. The previous CEO, Mr Ramadorai, it may be recalled had revved up the company during his tenure, and then demitted office in his own 'inimitable' style, after a long and very rewarding innings. TCS declared a very generous bonus issue offering of 1:1 in his last year in office, but much to the delight of all the beneficiaries. Mr Ramadorai was also an active participant of this 'largesse'. Mr Chandrasekaran unfortunately, has a long way to go before retirement.

Not to be outdone however, the new CEO has celebrated his first year in the corner office in his own 'unique' manner of giving. The company paid out a record dividend of Rs 20 a share or Rs 45.6 bn ----but more importantly it also constituted a neat 81.6% of distributable profits, of the standalone company, for the year, against a niggardly Rs 16 bn in the preceding year, or 34% of distributable profits. This new found love for shareholders one suspects was actually due to the demands made on the parent company Tata Sons, which holds 74% of TCS's outstanding equity. The Tatas have had to juggle the difficult portfolios of Corus Steel and Jaguar Motors, and this enhanced dividend payment would have come in very handy. Whatever, none of the shareholders are complaining.

Offshore shift raises margins

The annual report printed in 4 colours, is crammed with endless pages of hard core data and assorted graphical representations, which appears to have been included purely to make the annual report look more educative and attractive to the reader. What the report clearly reveals unintentionally however is that India is still only a mere bit player in value added terms, in the overall worldwide scheme of things in the IT sector. For the matter of record, the world wide IT spend in 2009 was in the region of US$ 1 trillion, or US$ 1000 bn, excluding the spend on R&D, engineering and on hardware.

The CEO very proudly informs that the operating margins of TCS increased to near historic highs of 26.7% during the latest accounting year. And to buttress the point he adds that this was made possible due to the increased emphasis on offshore revenues which rose to 51% from 44% in the preceding year. What is also most noteworthy is that the company has achieved similar profit margins before tax, both for the standalone unit and for the consolidated operations. Foreign and, other subsidiaries companies brought in a hefty Rs 70 bn or 23% of the top line during the year. An over achiever, but getting only muted coverage, is its BPO unit, TCS e-Serve, which has its operations in India, and, whose profit after tax zoomed to Rs 6.6 bn from Rs 820 m in the preceding year, on a far less substantive increase in rupee turnover.

A truly Indian MNC

TCS is an Indian MNC in every sense of the term, and is also the country's largest private sector employer. With operations in 42 countries and 160,000 employees from 80 nationalities to boot, the HR department has its work cut out. The salary bill is the biggest cost factor and accounts for 50% of the total turnover. But the revenue generated per employee appears to be slipping. In 2008-09 with a manpower utilisation rate of 69%, the company eked out revenues of Rs 1.93 m per employee. In the latest year, with a higher manpower utilisation rate of 74%, the figure had come down to Rs 1.87 m. (Infosys with a little over 92,000 employees under its belt, scores much higher in this respect). Between fiscal 2005 and today the consolidated entity has shown a slight variation in its expenditure control. In 2005 salaries accounted for 46% of turnover against 50% in the latest year. In 2005 'other costs' accounted for 26% of total revenues against 21% presently. Expenditure control is simply tops-it does not grow in a tangent, it merely shifts.

Paying less tax than Infosys

What is puzzling is that working in the same environs, TCS appears to be paying less direct tax to the Govt. than Infosys. On a standalone basis, the provision for taxes by TCS as a percentage of pre-tax profit was 11.8% in 2009-10 against 8.6% previously. On a consolidated basis the percentage figures were 14.4% and 13.6% respectively. Infosys has made a much higher provision for tax.

BFSI hogs the limelight

The company operates in 10 verticals - ranging from Banking, Financial Services and Insurance (BFSI), Telecom, Retail, Hi Tech, Travel Transport and Hospitality, Manufacturing, Life Sciences and Healthcare, Energy Resources and Utilities, Media Information and Services and, Government. That just about covers the entire hog of industries that one can conjure up-barring of course defence, mining, and agricultural sectors that is. But only 4 of the ten sectors merit personal attention in the annual report - BFSI, Manufacturing, Retail and Distribution, and, Telecom. The rest are bunched under the 'others' category and apparently have yet to pick up speed and reach a critical mass, before the management can extol on their individual virtues.

BFSI is the top dog in the pecking order, accounting for 45% of all consolidated revenues, with Telecom being number two with 15% share, and, followed in short order by Retail with 10.6%. BFSI also brings in 45% of the gross margin followed by Telecom with 15.8% and Retail with 10.1%. Magically enough all the verticals seem to be operating almost on the same margins.

Corporate India has developed this new found love affair with mutual funds. More importantly, 'churning funds' by buying and selling mutual funds to raise 'other income'. So TCS bought Rs 560 bn worth of mutual funds and sold Rs 553 bn worth. The exact profit made from this exercise is not known but the consolidated unit realized a net profit of Rs 1.6 bn from this ---including from other current investments.

Plenty of scope for expansion

North America is still where the action is for our IT companies and consequently a little over 52% of overall revenues continue to emanate from this region. This is followed by UK with 16% and Europe with 10.5%--UK gets separate billing!! India is nudging up the ladder with 8.6%. Asia-Pacific (APAC) and Latin Americas are still very undertapped regions bringing in only 5.2% and 4.7% respectively. Japan incidentally is the second biggest IT market after the USA - while China is looming larger by the year. The Middle East and Africa bring up the rear end with a pitiful 1.9%. Clearly, with Europe on the sick list and with no signs on any impending improvement here, there is plenty of scope for expansion in the marginal markets.

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
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Equitymaster Agora Research Private Limited

 

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