TCS –Hold- Sharekhan
Tata Consultancy Services (TCS)’ Q4FY2010 results were in line with our expectations on the revenue and the operating profit fronts. However, the earnings growth was ahead of our expectations due to higher other income (aided by foreign exchange [forex] gains of Rs42 crore) and decline in the effective tax rate.
The consolidated revenue (US GAAP) grew by 1.1% sequentially to Rs7,737 crore driven by growth in volumes (4%), positive pricing (5 basis points) and improved effort mix (16 basis points), partially offset by a negative currency impact (-3.1%). In dollar terms, the revenue grew by 3.1% sequentially to $1,686 million.
The earnings before interest and tax (EBIT) margin improved by 20 basis points sequentially to 27.5% in the quarter driven by productivity gains (247 basis points) and other cost cutting measures (42 basis points). The same was however partially offset by unfavourable currency movement (-192 basis points), unfavourable effort mix (-16 basis points) and bad debt provisions (-60 basis points).
The net income grew by 7.4% sequentially to Rs1,931 crore in the quarter, ahead of our expectation of Rs1,862 crore. The net income growth was on account of higher other income (Rs164 crore in Q4FY2010 versus Rs57 crore in Q3FY2010) and a 77-basis-point sequential decline in the effective income tax rate. The other income includes forex gains of around Rs42 crore, with the remaining coming largely from interest and dividend income.
The company’s board of directors has proposed a final dividend of Rs20 per share (including Rs4 per share as final dividend and Rs10 per share as special dividend) for FY2010 as compared to Rs14 per share for FY2009.
The company has won 10 deals during the quarter. Of this one deal is worth $500 million and a couple of others are worth $125 million, and indicates a healthy deal pipeline. In terms of demand environment, the company expects a strong volume growth from the banking, financial services and insurance (BFSI) vertical. It also expects retail and life sciences to post good volume growth and sees an up-tick in demand from telecom and manufacturing sectors.
However, the key highlight of the quarter was a record net employee addition of 10,110. Moreover, the management expects a net addition of around 16,000-17,000 employees in FY2011. This reflects the management’s growing confidence in the volume growth going ahead.
At the current market price, the stock is trading at 20.8x FY2011 and 18.5x FY2012 earnings estimate. We maintain our HOLD recommendation on the stock and would follow up with a detailed note soon.
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