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TATA Consultancy Services Q4FY10 Result Update

Contributed by Nirmal Bang

By Nirmal Bang

TATA Consultancy Services Ltd (TCS) offers global customers an integrated portfolio of services including a comprehensive range of IT and Application related services, Remote Infrastructure Management, BPO and Engineering services, front-ended by a strong, domain- led Global Consulting Practice. The company has a Global Network Delivery Model that allows it to deliver services to customers from multiple global locations in India, China, Europe, North America and Latin America. On the basis of parameters like revenues, profits, number of employees and market capitalization, TCS is among the top ten IT services companies in the world.

Key highlights for the year

- FY 2010 revenues grew by 8% YoY and Q4 FY10 topline grew by 7.9% YoY and 1.17% QoQ

- Inspite of the currency appreciation, TCS has the highest EBITDA margins for Q4 FY 10 since last three years driven by improved internal efficiency supported by increased utilization rate and cost controls

- TCS added 127 clients during FY 2010 out of which 9 clients were over $10 million

- TCS signed 10 major deals out of which one deal was for more than $ 500 million

- The company had a net addition of 16668 employees for FY 2010 and the highest ever net addition of 10775 employees In Q4 FY 10

- The company declared a dividend of Rs.20 for FY 2010 including Rs. 4 per share as final dividend and Rs.10 per share as special dividend as announced in Q4 FY10.

Quarterly Result Analysis

- TCS’s Q4 FY10 revenue saw a subdued growth of 1.2% QoQ to Rs.7738 Crs. In US dollar terms revenue witnessed a growth of 3.1% QoQ reflecting an improving demand scenario with economic recovery still underway.

- EBITDA margin improved to 30.2% (+51 bps QoQ) in Q4 FY10 driven by improved utilization rate (+70 bps QoQ) and 42 bps reduction in SG&A expenses.

- Net margin improved to 25.9% (+201 bps QoQ) in Q4 FY10 driven by improved EBITDA margin, higher interest & dividend income and foreign exchange gains during the quarter.

- TCS reported a diluted EPS of Rs.10.15 in Q4 FY10.

As per INDIAN GAAP

As per IFRS GAAP

Annual Result Analysis

- TCS’s FY 2010 revenue grew at a moderate pace of 8% YoY to Rs.30029 Crs due to the global economic slowdown which began in 2H FY2009. In US dollar terms revenue witnessed a moderate growth of 5.37 % YoY.

- Operating margin improved to 26.7% (+304 bps YoY) in FY 2010 driven by 159 bps reduction in the cost of revenues, improved utilization rate (+70 bps YoY) and decline in SG&A expenses

- Net margin improved to 23.3% (+441 bps YoY) in FY 2010 driven by improved EBITDA margin, higher interest income and lower exchange losses during the year.

- TCS reported a diluted EPS of Rs.35.67 in FY 2010. TCS declared a dividend of Rs.10 per share as special dividend and Rs.4 as final dividend which takes the total dividend to Rs20 per share

Increase in volumes in Q4 FY10 and FY 2010

- Volumes witnessed a growth of 4% QoQ and 17.4% YoY.

- Pricing declined by 3.3% during the quarter while it remained flat for FY 2010. This gives an indication of pricing pressures due to clients’ bargaining power.

Client Additions

The Client addition in Q4 FY10 stood at 39 as compared to 32 in Q3 FY10, while TCS added 127 clients in FY 2010. TCS added 14 large clients of which 6 clients were in US$10 mn bracket, 2 clients were in US$20 mn bracket and 1 client was above US$ 100 mn revenues.

Key Wins during the quarter.

- A European government agency awarded TCS a US$ 500 mn plus contract to be the administrator for their pension scheme

- In a multi-year deal worth over US$100 mn, a leading global electronics conglomerate has chosen TCS as the strategic partner for end to end infrastructure services including business transformation

- TCS has signed a multi million, multi-year deal with a global telecommunications provider for its European operations for managing their enterprise products

- A leading retailer in North America has awarded TCS a multi-million dollar contract to streamline operations

- A US based commercial insurance company selected TCS as its IT transformation partner

Net Addition in employee adds optimism

The Gross addition of employee increased significantly and stood at 16851 in Q4 FY10 as compared to 12854 in Q3 FY10 and 9935 in Q2 FY10. This led to a highest ever net addition of 10775 employees in Q4 FY10. For FY 2010, TCS had a net addition of 16668 employees and attrition rate of 11.8%.

TCS has started recruiting very aggressively and has made 20,000 offers across 371 institutions so far for FY 2011. Moreover, it aims to hire 30,000 gross people in FY 2011.

Margins set to decline in near term

Company’s EBITDA margin has increased to 30.2% in Q4 FY10 which is its highest margin over last 3 years. With the aggressive hiring of freshers, we expect the company’s cost to increase in near term and thereby margin to decline.

Outlook

The better-than-expected Q4 FY10 result reflects the improvement in the US economy which continues to lead the demand recovery. TCS stated that APAC and India are also seeing strong demand driven by growth in sectors like BFSI, Retail and Life Sciences & Healthcare. TCS recorded positive business growth across all verticals. Demand recovery that started in the BFSI segment has now become more broad-based, with Telecom, Energy & Utility and Manufacturing showing slight recovery. Going forward, we expect the demand to continue to improve.

INR appreciation remains a major concern

However, rupee appreciation is expected to negatively impact the company’s top-line growth. The rupee appreciation during Q4 FY10 impacted company’s top-line by around 3% in INR terms. If the rate declines further, it will impact the company’s profitability.

Valuation

At current price of Rs.789.6 TCS is trading at PE multiple of 19.45 at its annualized EPS of Q4 FY10 (Rs.10.15) and at PE multiple of 22.14 at its EPS of FY 2010 (Rs.35.67). Going forward we expect a strong growth for TCS led by robust demand in BFSI, Retail and Life Sciences & Healthcare and a recovering demand scenario for verticals like Telecom, Manufacturing and Energy & Utility. We expect TCS to trade at a discount to Infosys, which commands a PE multiple of 24. Increase in demand from the US and recovery from Europe may increase the demand in future. However, rupee appreciation against the US dollar remains a slight concern in the near term. Moreover, we may expect the company’s margin to decline for the reasons mentioned above.