TCS meets street expectations, net jumps 31.1%

India’s largest information technology (IT) services provider Tata Consultancy Services’ (TCS’) fourth quarter and annual results have met street expectations. With the discretionary spend and all-round growth across verticals and geographies, the company’s net profit for the fourth quarter ended March 2011, touched Rs 2,623 crore, up 31.1 per cent from Rs 2,001 crore in the corresponding quarter last financial year.

Despite a weak quarter, TCS added 39 clients. It’s revenue for the quarter grew 31.3 per cent to Rs 10,157 crore from Rs 7,738 crore in the corresponding quarter last year. In US dollar terms, TCS net profit was up 2.7 per cent year-on-year (y-o-y) at $531 million and revenues at $2.24 billion grew 4.7 per cent y-o-y sequentially; much better than its close competitor Infosys Technologies that reported a 1.1 per cent growth in dollar revenue on a sequential basis. After the lacklustre fourth quarter and annual numbers of Bangalore-based Infosys Technologies, the street was expecting TCS to post better numbers. Compared to Infosys, that reported a dip in volume growth by 1.3 per cent, TCS reported a volume growth of 2.9 per cent. However, despite meeting analyst expectations, the company’s stock price was down 2.23 per cent as it closed at Rs 1,191.6 per share. “TCS stock run-up was due to the high expectation that was getting built-up. I think this dip is more of a correction,” said an analyst on condition of anonymity.

“A 4.7 per cent sequential growth in dollar-revenues is in line with street expectations (slightly below our expectations of five per cent q-o-q, but healthy nevertheless). Good topline growth should allay investor concerns on industry-wide demand, which had arisen after the poor Infosys report,” said a CLSA report. For the financial year 2011, TCS net profit at Rs 9,068 crore were up 29.5 per cent compared to last year. The company also clocked revenue of Rs 37,325 crore ($8.2 billion) for the year, up 24.3 per cent. “It is been a good quarter. We grew by 5.1 per cent this quarter. That means our revenues in this quarter were above Rs 10,000 crore. We are exiting a financial year at one of the highest margins levels. We have had a very well-rounded growth across all verticals and regions. More importantly, this quarter we have seen discretionary spend coming back and we are looking forward to a great year,” said N Chandrasekaran, CEO and managing director.
 

SCORECARD
TCS
	Revenue	Net profit*
Mar 2006	13,263.99	2,966.74
Mar 2007	18,685.21	4,212.63
Mar 2008	22,619.52	5,026.02
Mar 2009	27,812.88	5,256.42
Mar 2010	30,028.92	7,000.64
Mar 2011	37,325.00	9,068.00
3- year CAGR	18.17	21.74
INFOSYS TECHNOLOGIES
	Revenue	Net profit*
Mar 2006	9,521.00	2,458.00
Mar 2007	13,893.00	3,856.00
Mar 2008	16,692.00	4,659.00
Mar 2009	21,693.00	5,988.00
Mar 2010	22,742.00	6,266.00
Mar 2011	27,501.00	6,835.00
3-year CAGR	18.11	13.63
Note: Based on FY 11 results;  *Net Profit after Minority Interest & P/L Asso.Co. All figures are in ' crore; Consolidated basis  Source: Capitaline

Emkay Global Financial Services, Head (Institutional Research) Ajay Parmar said, “In all, it is an in-line performance from TCS, especially after the big disappointment at bellwether Infosys last week. We believe TCS’s results reinforce the strong demand for Indian techs. However, we do not foresee any meaningful earning upgrades from the current results,” he said. At 28 per cent operating margins, TCS also managed to maintain its margins despite a higher intake of employees. On a sequential basis, TCS' operating margins were down six basis points. On a year-on-year basis, it was up 51 basis points.

“If you look at the last four quarters, we have been able to maintain our margins at 28 per cent range. In this quarter, though, we had a positive impact of 0.6 per cent due to forex gains. We were negatively impacted by offshoring (-0.2 per cent) and SG&A (-0.6 per cent). We have also added over 19,000 employees this quarter,” said S Mahalingam, CFO and executive director.

TCS, which counts Citigroup and General Electric among its clients, saw its North America revenue grow by 4.4 per cent q-o-q. Its revenue in Europe grew over five per cent and in other regions by 8.1 per cent. However, because of the Indian region being cyclical, the revenue growth was flattish. It said that UK has been a tad slow in growth, on a constant currency basis UK grew 0.8 per cent q-o-q.

“TCS has out-performed Infosys in terms of revenue growth over the past few quarters. It will have to work harder to sustain the high level of margins. TCS revenues and operating profits were in line with expectations. The volume growth at 2.9 per cent, though better than Infosys’ reported growth, was marginally lower than our expectations. The margins' performance was very much in line. The growth has been well rounded with most geographies, services and verticals contributing to the same. The 12-14 per cent offshore salary rise reflects the high level of confidence,” said Dipen Shah, senior vice-president (Private Client Group Research), Kotak Securities.