- Dollar revenues in-line with expectation; Volume growth better than expected
- Broad based growth across verticals/geographies; ERP and IMS shine amongst services
- OPM ahead of expectation supported by productivity gains; Employee additions impressive
- Strong quarter with positive management commentary keep us enthused; Valuation restricts upside potential
|(Rs mn)||Q4 FY13||Q3 FY13||% qoq||Q4 FY12||% yoy|
|OPM (%)||28.4||29.0||(60) bps||29.5||(116) bps|
|Effective tax rate (%)||23.9||21.8||-||21.3||-|
|Adj. PAT margin (%)||21.9||22.1||(21) bps||22.2||(32) bps|
Dollar revenues in-line with expectation; Volume growth better than expected
TCS Q4 FY13 revenue performance was in-line with expectation with dollar revenue growing 3.1% qoq. This growth was on the back of stronger than expected volumes (+4.4% qoq) and negative cross currency impact of 90bps. The sequential volume growth was strong considering a traditionally weak nature of the quarter. The pricing environment remained stable during the quarter. Management commentary on demand environment continued to be robust especially on discretionary spends, deal closures and executable order book. Company announced eleven large deals across verticals and geographies.
Broad based growth across verticals/geographies; ERP and IMS shine amongst services
The growth across verticals and geographies remained fairly broad based during Q4 FY13. Amongst key verticals, the growth was driven by BFSI (+4.3% qoq) followed by Retail (+3.1% qoq) and manufacturing (+3.1% qoq). Within services, the growth was skewed towards IMS (+6.6% qoq) and ERP (+5.9% qoq). ADM revenues also picked up growing 3.1% qoq versus 1.7% qoq growth last quarter. Within geographies, India business (+19.4% qoq) showed stellar growth contributing ~50% of the incremental dollar revenues.
Within developed markets, in dollar terms, NA grew 2.1% qoq followed by 3.1% qoq growth for continental Europe. Excluding currency impact, UK had also had a strong growth of ~4% qoq. From clients’ perspective, while the top client remained flat, the growth of Top6-10 clients was strong at 6% qoq.
OPM ahead of expectation supported by productivity gains; Employee additions impressive
In Q4 FY13, TCS maintained its impeccable cost/productivity management resulting in OPM coming in marginally ahead of expectation at 28.4% (our estimate28.2%). More specifically, the cross currency impact of 68bps and law suit settlement impact of 98bps was largely offset by productivity gains (+94bps). Lower than expected other income and higher tax rates resulted in net profits at Rs35.9bn coming ~2.5% below our estimates. Employee additions continued to be robust with gross additions at 20098 employees (7.6% of previous quarter employee base). Attrition moderated further to 9.4% versus 9.8% in the previous quarter. Company has guided toward addition of 45000 employees for FY14 of which 25000 are campus hires. Also, wage hikes for its employees are expected in the range of 6-8% for offshore (India), 2-4% onsite and 4-6% for other emerging markets (effective Q1 FY14).
Strong quarter with positive management commentary keep us enthused; Valuations restrict upside potential; Maintain MP
The broad based vertical/service-line/geography presence as well as impeccable execution has held the company in good stead. Vindicating the same was Q4 FY13 - another quarter of strong all round performance by TCS. Volume growth of 4.4% qoq on a high base (US$3.03bn) and in a seasonally weak quarter is indeed commendable. Management commentary has remained bullish with an expectation of beating Nasscom’s 12-14% industry growth guidance for FY14. The continued deal wins as well as robust employee addition supports the same. We maintain our industry leading growth thesis for TCS and expect the company to post a 15% CAGR (13% earlier) over FY13-15E. On the other hand, we expect the OPM for the company to remain range bound considering the limited margin levers. Post factoring in a probable increase of tax-rate (+200bps) in coming fiscal, we now expect the earnings to grow at 11% CAGR over the same period. P/E valuations at 16.5x FY15E earnings restrict upsides. Maintain MP.
|Y/e 31 Mar (Rs m)||FY12||FY13||FY14E||FY15E|
|yoy growth (%)||31.0||28.8||15.2||16.1|
|yoy growth (%)||22.7||30.9||7.9||15.6|
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