TCS Ltd (Q3 FY14)

India Infoline News Service | Mumbai |

TCS delivered a slower than expected dollar revenue growth of 2.1% qoq in constant currency (CC) terms v/s our estimate of 2.8% qoq.

CMP Rs2,351, Target Rs2,650, Upside 13.0%
  • Slower than expected revenue growth; volume growth was muted while realization improved materially 

  • Sustained broad-based growth across segments; Discretionary services continue to grow well

  • OPM performance in-line; margin outlook stable

  • Relatively modest quarter; substantial valuation premium to peers could limit absolute re-rating in the near term

Result table
(Rs mn)
Q3 FY14
Q2 FY14
% qoq
Q3 FY13
% yoy
Net sales
212,940
209,772
1.5
160,699
32.5
Operating profit
66,866
66,390
0.7
46,540
43.7
OPM (%)
31.4
31.6
(25) bps
29.0
244 bps
Depreciation
3,519
3,095
13.7
2,731
28.9
Other Income
-
-
-
-
-
PBT
6,729
(427)
-
2,133
215.5
Tax
70,076
62,868
11.5
45,942
52.5
Effective tax rate (%)
16,524
15,563
6.2
10,025
64.8
Other prov./minority
23.6
24.8
-
21.8
-
Adjusted PAT
412
287
43.6
399
3.3
Adj. PAT margin (%)
53,140
47,018
13.0
35,518
49.6
Reported PAT
25.0
22.4
254 bps
22.1
285 bps
EPS (Rs)
53,140
47,018
13.0
35,518
49.6
Source: Company, India Infoline Research

Slower than expected revenue growth; volume growth was muted while realization improved materially  

TCS delivered a slower than expected dollar revenue growth of 2.1% qoq in constant currency (CC) terms v/s our estimate of 2.8% qoq. Volume growth moderated significantly to 1.8% qoq from 7.3% qoq in the previous quarter on account of lower working days and sustained weakness in India business (excluding this overall volume growth was 2.9% qoq). Pricing surprisingly improved materially qoq likely due to change in service mix and aided sequential revenue growth by 0.75%. Offshore efforts shift impacted sequential growth by around 40bps. The reported dollar revenue growth of TCS stood at 3% qoq with 0.9% growth being driven by favourable movements in the cross currencies. Management commentary on demand environment continued to be positive especially on its client budgets/spend and revenue growth in FY15.


Sustained broad based growth across segments; Discretionary services continue to grow well

Excluding the revenue contraction in India business, Q3 FY14 was yet another quarter of broad based revenue growth. Amongst verticals, growth was driven by Telecom (6.4% qoq), Manufacturing (7.9% qoq), Travel (6.1% qoq) and Life Sciences (6.6% qoq). Amongst services, Enterprise solutions (5% qoq), Consulting (6.1% qoq), Infrastructure services (4.8% qoq) and BPO (4.8% qoq) were the key growth drivers. We note that discretionary services (ERP, Consulting) continue to grow ahead of the company indicating sustained pick-up. Amongst geographies, while revenues from India market declined 6% qoq, the growth was strong in Europe (5.2% qoq), APAC (7.4%) and MEA (13.3% qoq) regions.

 

OPM performance in-line; outlook is stable

TCS’s OPM marginally contracted by 25bps qoq to 31.4%, still standing significantly higher than Infosys. Improvement in realizations, higher utilization (250bps qoq increase) and offshore shift drove about 65bps expansion in the margin. However, TCS re-invested these operational benefits in the front-end areas. While utilization at current levels could be challenging to sustain, other operational efficiencies should enable the company in delivering 30%+ OPM in FY15/16. Company added net 5,463 employees (2% of Q2 FY14 base) and has raised its annual gross employee addition guidance to 55,000. IT services attrition (LTM) continue to inch-up and stood 10.3%; it however remains lower than peers. Aided by significantly higher other income, net profit of the company came in ahead of our estimate.   


Relatively modest quarter; substantial valuation premium to peers could limit absolute re-rating in the near term  

TCS’ performance though healthy in a seasonally weak quarter is unlikely to materially change operational assumptions of the street for FY14/15/16. This in the context of relatively robust performance from peers could threaten its valuation premium or limit further absolute re-rating in the near term. However, on rolling over valuation to FY16 our target price still suggests healthy upside. Rate the stock as BUY with 9-12 month TP to Rs2,650. 


Financial Summary
BSE 2,617.75 16.75 (0.64%)
NSE 2,620.00 18.50 (0.71%)

***Note: This is a NSE Chart

 

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