TCS Ltd (Q4 FY14)

India Infoline News Service | Mumbai |

TCS delivered a slightly slower than expected constant currency dollar revenue growth of 1.9% qoq.

CMP Rs2,223, Target Rs2,505, Upside 12.7%
  • Modest revenue growth in Q4 FY14 but FY15 commentary continues to be strong 

  • Growth patterns were divergent within geographies, verticals and service lines

  • Operating margin decline by 50bps qoq; company announces higher-than-peer wage hikes

  • Premium valuation to limit near term upside; lower 9-12 month price target to Rs2,505 but retain Buy recommendation.

Result table

(Rs mn)
Q4 FY14
Q3 FY14
% qoq
Q4 FY13
% yoy
Net sales
215,511
212,940
1.2
164,301
31.2
Operating profit
66,534
66,866
(0.5)
46,599
42.8
OPM (%)
30.9
31.4
(52) bps
28.4
251 bps
Depreciation
3,724
3,519
5.8
3,015
23.5
Other Income
6,990
6,729
-
4,184
67.1
PBT
69,800
70,076
(0.4)
47,768
46.1
Tax
16,313
16,524
(1.3)
11,420
42.8
Effective tax rate (%)
23.4
23.6
-
23.9
-
Other prov./minority
520
412
26.2
380
36.8
Adjusted PAT
52,967
53,140
(0.3)
35,968
47.3
Adj. PAT margin (%)
24.6
25.0
(37) bps
21.9
268 bps
EPS (Rs)
27.1
27.2
(0.3)
18.4
47.3
Source: Company, India Infoline Research

Modest revenue growth in Q4 FY14 but FY15 commentary continues to be strong 

TCS delivered a slightly slower than expected constant currency dollar revenue growth of 1.9% qoq. While volume growth was marginally better than Q3 FY14 at 2.6%, blended pricing declined qoq by 0.8% attributable to the change in service mix. Onsite effort shift aided sequential revenue growth by 0.2%. Though, TCS’s revenue growth in H2 FY14 (2.5% CQGR) was notably weak as compared to H1 FY14 (4.8% CQGR), management commentary on demand environment and FY15 growth continues to remain strong. Company is expecting to surpass FY14 revenue growth of 16% in FY15 thus implying a strong CQGR of 4.5-5% over the coming four quarters. TCS’s confidence about brisk growth stems from its current sizeable order book, encouraging signals from client interactions, robust deal pipeline and its ability to execute. During Q4 FY14 company won nine large deals, one each in every vertical.   


Growth patterns were divergent this time

Unlike the broad-based nature of growth in the previous quarter, growth patterns within geographies, verticals and service lines were divergent during Q4 FY14. Amongst verticals, there was sequential de-growth in retail, manufacturing and telecom while revenues in life sciences/healthcare and media grew at strong pace. Europe region grew by robust 4.7% qoq, in-line with the trend of previous three quarters, whereas US and India revenues were largely flat qoq. Within services lines, asset leveraged solutions (15% qoq) and engineering services (6% qoq) witnessed brisk traction while IMS, enterprise solutions and consulting grew in-line with the company.


Operating margin decline by 50bps qoq; outlook is stable

TCS’s OPM contracted by higher-than-anticipated 53bps qoq to 30.9%, but still stood materially higher than Infosys. While elevated employee utilization levels were sustained despite modest revenue traction, decline in blended pricing and continued reinvestment (towards strengthening front-end areas) drove the margin lower. Company has given a wage hike of average 10% offshore and 2-4% onsite effective April 1st 2014 which is higher than salary hikes announced by Infosys. Therefore, better-than-industry hikes, annual promotions and strong growth delivery would help company is containing attrition near current level of 11%.


TCS added net 9,751 employees, 3.5% of Q3 FY14 base, thus suggesting a pick-up in execution in the near term. In the longer term, we expect the company to sustain operating margin in narrow range of 30-31% backed by TCS’s comfort to operate at high utilization levels. Offshore shift and productivity benefits from fixed priced contracts (the share of which has risen over the past two years) are probable levers to mitigate headwinds from rupee appreciation.


Premium valuation to limit near term upside

BSE 2,547.85 [10.70] ([0.42]%)
NSE 2,545.60 [12.20] ([0.48]%)

***Note: This is a NSE Chart

 

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