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TCS, Infosys back in the game with strong Q2 results

October 17, 2014 10:04 IST

While TCS has continuously outpaced its peers in the past two or three years, rival Infosys Technologies also managed to post better-than-expected numbers in the previous quarter. 

Image: TCS has reported good set of number in Q2. Photograph: Courtesy, TCS

Tata Consultancy Services (TCS), India's largest information technology services company, continued with its strong financial performance to post 13.6 per cent annual net profit growth in the July-September quarter.

By International Financial Reporting Standards, or IFRS, the company's revenue rose by 13.5 per cent on a year-on-year basis to Rs 23,816 crore (Rs 238.16 billion) and net profit by 13.6 per cent to Rs 5,288 crore (Rs 52.88 billion).

On a sequential basis the rates of growth in revenue and net profit were 7.7 per cent and 4.6 per cent, respectively.

The company's Ebitda (earnings before interest tax and depreciation) in the three-month period stood at Rs 6,809 crore (Rs 68.09 billion), compared with Rs 6,639 crore (Rs 66.39 billion) a year ago and Rs 6,367 crore (Rs 63.67 billion) in the previous quarter.

Ebitda margin, though, declined 306 basis points on a year-on-year basis and 21 bps sequentially, to Rs 28.6 per cent.

Image: TCS Chief Executive Officer and Managing Director N Chandrasekaran. Photographs: Reuters

The consolidation of Mitsubishi ITF (with which TCS merged its Japanese units earlier this year) had an impact of 50 basis points on the margin.

A sequential increase of 8.1 per cent in cost of revenues (including employee costs) and a 30 per cent decline in 'other income' from the previous quarter also had a bearing on the Ebitda margin.

Among factors that positively influenced margins were the rupee's depreciation (70 basis points) and operational improvement (20 basis points).

The company's top line in the September quarter was driven by 6.1 per cent volume growth on a quarter-on-quarter basis.

Its employee utilisation rate, at 86.2 per cent (excluding trainees), was its higher ever. Almost all geographies and verticals contributed to the company's growth.

TCS Chief Executive Officer and Managing Director N Chandrasekaran on Thursday said: "Driven by strong volumes and robust utilisation rates, this has been a quarter of steady, consistent performance. Our well-rounded showing was highlighted by broad-based growth in key markets, industries and services, as we continued to deepen our engagement with customers."

Image: TCS reported 13.6 per cent jump during the July-Sep quarter. Photograph: Vivek Prakahs/Reuters

The overall numbers, however, were slightly short of Bloomberg's consensus expectation of Rs 24,009 crore in revenue and Rs 5,368 crore in net profit.

The Ebitda margin, too, was lower than the expected 29.1 per cent.

CMC's merger with TCS The company also announced the merger of subsidiary CMC with itself, where shareholders would get 79 TCS shares of Rs 1 each for 100 CMC shares of Rs 10 each.

Though analysts questioned the timing of this amalgamation, they gave a thumbs-up to the share-swap ratio.

Sagar Rastogi, technology analyst at Ambit Capital, said: "There had been rumours about CMC's merger with TCS earlier, too. But we would like to know the rationale of such a move now.

The share-swap ratio, though, is about three per cent more favourable for TCS shareholders."

The merger is subject to approvals and might take at least six months to be completed.

It will help TCS realise cost savings, even as the impact on TCS' consolidated financials will be negligible because CMC's revenues and profits are already part of TCS' India business segment.

Image: Infosys will perform much better in ensuing quarters, say analysts. Photograph: Reuters

TCS vs Infosys

While TCS has continuously outpaced its peers in the past two or three years, rival Infosys Technologies also managed to post better-than-expected numbers in the previous quarter.

The TCS stock currently trades at 22 times the company's estimated earnings in 2015-16 - at a 37 per cent premium to Infosys' scrip, which trades at 16 times its 2015-16 estimated earnings.

However, if Infosys continues with its good show in the coming quarters, analysts believe, this premium might shrink.

"Infosys' organic revenue growth, its constant currency, was 3.9 per cent.

That is quite close to TCS' 4.6 per cent. If this trend continues for Infosys, we believe TCS' valuation premium over Infosys will reduce significantly," said Rastogi.

Given its consistent financial performance, TCS remains the top pick in the sector for most brokerages, though rich valuations might cap significant upsides from the current level.

Infosys, on the other hand, will have to perform consistently for a re-rating. The merger of TCS' Japanese units with Mitsubishi ITF added $103 million to TCS' total revenue of $3,929 million (up 6.4 per cent sequentially).

TCS' organic revenue growth was marginally short of expectations, given a decline in the insurance business and the Latin America (4.8 per cent) market, coupled with a lower-than-expected ramp-up in retail deals.

Image: Infosys management expect good growth in FY15. Photograph: Sivaram V/Reuters

Infosys' dollar revenue growth of 3.2 per cent, by comparison, was largely in line with expectations. Large deal wins remained significant for both TCS (eight deals) and Infosys (six).

TCS' volume growth rate of 6.1 per cent in the September quarter was double of Infosys' three per cent.

The TCS management continues to be bullish and expects to beat Nasscom's revenue growth target of 13-15 per cent for this financial year.

Growth drivers & pressure points Chandrasekaran said: "Among markets, the US and Europe have done well. India has done exceptionally well, while Latin America has seen a slight de-growth."

Optimistic on the Indian market, which grew nine per cent sequentially, he said he believed growth was back, driven by private-sector capital expenditure and the government's increased thrust on making India digital.

Among verticals, BFSI and retail grew at healthy rates to account for about half of the company's revenues.

Manufacturing (up 26.7 per cent), hi-tech (12.7 per cent) and energy (up 16.9 per cent) fuelled growth, while insurance continued to be under pressure, thanks to a weak show by Diligenta, a UK-based company acquired by TCS.

Image: Overall, there will be good growth in the IT sector, say experts. Photograph: Reuters

The management expects a pick-up in this to be gradual. It hopes to garner at least $5 billion in revenues from Digital technologies over the next four to five years, and believes the Japanese operations would achieve meaningful growth over two to three years.

At 12.8 per cent, TCS' employee attrition was stable in the September quarter, compared with 12.3 per cent the previous quarter.

Compared with the June quarter, clients contributing more than $50 million in revenues increased by four to 62, while those contributing over $20 million increased by nine to 153. 

On the road ahead, the company said the October-December quarter would be soft, given higher furlows in manufacturing and emphasis on holidays by the retail sector.

TCS has hired 36,000 people so far this financial year and is likely to exceed the target of 55,000 for full year.

It expects robust growth for its business process outsourcing segment to continue.

Sheetal Agarwal and Aditi Divekar
Source: source image