TCS Q1 FY 2011-12 Results Analysis
Tata Consultancy Services (TCS) reported a 6.3% QoQ growth in sales and a 7.9% QoQ decline in net profits in its Q1 FY 2011-2012 (1QFY12) results.
Performance at a Glance
- Net sales grew by 6.3% QoQ in 1QFY12, largely driven by 7.5% growth in volumes. Operating margins declined by 2.4% QoQ due to higher cost of sales.
- Net profit declined by 7.9% QoQ during the quarter. This was mainly on account of higher interest expenses and lower operating margins during the quarter.
- Added 24 new clients during the quarter. Total number of active clients at the end of the quarter was 959.
- Added a net of around 3,576 employees during the quarter. Attrition rate currently stands at 14.8%.
- Infosys proposed an interim dividend of Rs 3 per share.
Results Analysis
- Revenues grew by 6.3% QoQ on account of volume growth of nearly 7.5%. The Revenues from various geographics areas grew during this quarter as shown below:
- From Middle East and Africa: Grew by 16.9% Q-o-Q.
- From India : Grew by 12.3% Q-o-Q.
- From Asia-Pacific: Grew by 7.8% Q-o-Q.
- From Continental Europe: Grew by 6.3% Q-o-Q.
- From North America: Grew by 5.3% Q-o-Q.
- From United Kigdom (UK) : Grew by 4.9% Q-o-Q.
- In terms of industry verticals, TCS saw a robust growth across almost all its key verticals except for the ‘Energy & Utilities’ vertical, which witnessed a decline of 12.2% QoQ. The major drivers were the ‘hi-tech’, ‘telecom’, ‘retail and ‘manufacturing’ verticals. These grew by 14.2% QoQ, 13.1% QoQ, 10.1% QoQ and 7.7% QoQ respectively. The key segment of the company - banking and financial services (BFSI) - (43% of total sales) witnessed a decent growth of 4.6% QoQ during the quarter.
- In terms of service offerings, the main service offering of application development and maintenance clocked a robust growth of 6.5% QoQ during the quarter. The ‘Global Consulting’, ‘Infrastructure services’ and ‘Assurance Services’ drove the growth for the company and recorded an increase of 11.4% QoQ, 11.0% QoQ and 10.9% QoQ. The BPO division, however, witnessed a decline of 0.1% QoQ.
- The total TCS employee base now stands at around 202,190 with an addition of 3576 employee during this quarter. The attrition increased marginally to 14.8% during the quarter. The increase is despite the salary hikes given by the company to its employees.
- On account of higher interest costs which rose by 57% QoQ during the quarter, the net profits declined by 7.9% QoQ.
- Operating margins declined by 2.4% QoQ during the quarter. This was mainly due to slightly lower cost of sales (as a percentage of sales). This increase in turn was on account of higher employee related expenses. The company has given salary hikes in the range of 10-12% to its employees during the quarter.
Verdict
At the current price of Rs 1,154, the stock is trading at a multiple of 17.1 times our estimated FY14 earnings. TCS showed strong performance during this quarter where the growth in revenues was largely driven by the volumes across all major business segments and operating regions.
The management has stated that the uncertainty in global environment will continue to boost the demand for services in the near future. This is particularly so for the BFSI segment. The management is also upbeat about the demand for the telecom vertical. This is expected to be driven by the growth in telecom sector especially in the emerging markets.
TCS has good employee utilization level of 83.2% during the quarter and the management expects to continue this trend.
Though TCS is a good company to hold for long term, at the moment the stock price seems a little too expensive. You can buy TCS if the price comes down by around 8 to 10% from current levels for a 15% annual returns from a 3 years perspective.
