IT majors post mixed results

QUARTERLY RESULT ANALYSIS: March 2005

 TCS
Negative other income drags profit before tax

 TCS's results for the March quarter were disappointing, with revenues growing by just 0.2 per cent in rupee terms on a sequential basis.  Revenues had grown by 6.1 and 13.9 per cent in the pervious two quarters. What's more, operating margin fell by 250 basis points, leading to a 8.6 per cent drop in the company's operating profit.  The company had reported an other income of Rs 104 crore in the December quarter, thanks to huge mark-to-market gains on its forward cover.  Other income was expected to come down in the March quarter, but surprisingly, TCS reported a negative figure of Rs 36 crore. This resulted in a 24 per cent drop in profit before tax. 

TCS
(In Rs Cr)	Q4FY05	Q3FY05	% change
Net sales	2584.555	2578.435	0.24
Other Income	-36.036	104.084	-134.62
Operating Profit	674.762	738.456	-8.63
OPM (%)	26.11	28.64	-
Net Profit	566.88	709.34	-20.08
NPM (%)	21.93	27.51	-
EPS (Rs)	12.05	15.08	-
Trailing 12-month P/E			24.2

 

TCS's revenues growth fell to 3 per cent in dollar terms, owing to a delay in ramp-ups by clients. If that's the case, growth could pick up in subsequent quarters. Also, the December quarter was believed to be a high base, with the closure of some large fixed-price contracts.

The drop in margins was mainly owing to the flat trend in revenues. The delay in ramp ups led to an increase in the cost of non-billed employees. Besides, provisions for doubtful debts almost doubled mainly because of provisions made by CMC.

TCS has seen an increase in the proportion of offshore services in FY05 to 38.7 per cent, compared to 36.2 per cent in FY04.

The number of million-dollar clients it has increased to 214 last fiscal, compared to 155 in FY05, while the number of $10 million clients rose to 42 against 30 in FY04.

The company added 10,871 employees in FY05, and the outlook for FY06 is bright on this front with the company already having made over 6,500 campus offers.

 With fixed-price contracts still accounting for about 52 per cent of revenues, it's inevitable that quarterly variations would be volatile in the case of TCS.  Looking at the company's annual performance, therefore, makes more sense. For the whole year, TCS grew revenues by 36.6 per cent, while its earnings before one-off items grew by 37.8 per cent.  While the growth rates are good given TCS's high base, competitors like Infosys have grown at higher rates. Infy's higher valuation, therefore, is justified. Nevertheless, at 18.5 times estimated FY06 earnings, TCS now trades at a substantial discount to Infy, which gets a valuation of over 21 times.  WIPRO
IT services business aids revenue growth  Wipro reported a 4.3 per cent sequential growth in revenues and a 5.4 per cent rise in operating income of the global IT services and products division.  In dollar terms, revenue growth was 6.4 per cent, driven by a 6.8 per cent growth in the IT services business. BPO revenues grew at a lower rate of 3 per cent. 

WIPRO (Global IT)
(In Rs Cr)	Q4FY05	Q3FY05	% change
Net sales	1647.12	1578.94	4.32
Other Income	18.795	10.1	86.11
Operating Profit	416.39	402.72	3.39
OPM (%)	25.28	25.51	-
Profit Before Tax	435.18	412.82	5.42
PBT (%)	26.42	26.15	-
Trailing 12-month P/E			28.5

Volumes in the IT services business grew by an impressive 8.5 per cent, the highest among top-tier companies for the March quarter. Revenue growth was lower in dollar terms because offshore billing rates fell by 0.9 per cent, while onsite rates were 2.1 per cent lower.

Growth was even lower in rupee terms, thanks to a 2.9 per cent appreciation in average rupee rates, from Rs 45.11 in Q3 to 43.8 last quarter.

The negative impact of lower realisations and an appreciating rupee was offset by a two percentage point improvement in utilisation and a shift to offshore work.

Gross margins saw an improvement of 83 basis points last quarter. Selling, general and administrative expenses, however, rose by 100 basis points, leading to a marginal hit on the company's operating margin.

Wipro added about 7000 employees in FY05, considerably lower than the additions made by TCS and Infy. Campus offers made by the company for FY06, however, are slightly higher than its peers.

The attrition rate in the company's IT services business has come down considerably to 12 per cent, compared to 17-18 per cent earlier in the year.

 Wipro has said it expects June quarter revenues to be approximately $395 million, a growth of 5.4 per cent compared to the March quarter. This compares well with Infy's guidance of a 1-2 per cent growth.  To add to that, it declared a 1:1 bonus and a dividend of Rs 5 per share. This resulted in a 6.6 per cent jump in Wipro's share price on Friday to Rs 644, making it the best performing top-tier IT stock since Infy announced results.  Also, Wipro's valuation is back in line with Infy after a long gap. This seems unwarranted given Infy's more consistent track record.  CORPORATION BANK
Depreciation, fall in treasury income dent net  Corporation Bank posted a mixed set of numbers. While net interest income grew 16.57 per cent to Rs 286.61 crore, net profit fell 9.98 per cent to Rs 107.57 crore.  This was due to depreciation on investments on account of shifting of portfolio from the 'available to sale' category to the 'held to maturity' category, decline in treasury profit and rise in provisions for bad and doubtful debts. 

Corporation Bank
(In Rs Cr)	Q4FY05	Q3FY05	% change
Interest earned	576.65	553.18	4.24
Interest expended	290.04	307.32	-5.62
Net interest income	286.61	245.86	16.57
Other income	126.6	95.23	32.94
Operating profit	259.88	180.73	43.79
OPM (%)	36.95	27.87	-
Net profit	107.57	119.49	-9.98
NPM (%)	15.3	18.43	-
EPS (Rs)	7.5	8.33	-
12-month trailing P/E			12.29

Net interest income grew on the back of a rise in interest income (up 4.24 per cent to Rs 576.65 crore) and a fall in interest expended (down 5.62 per cent to Rs 290.04 crore). Net interest margins improved 18 basis points to 3.94 per cent.

The bank's business remained robust - while deposits rose 17.43 per cent to Rs 27,233 crore, advances grew 33.52 per cent to Rs 18,546 crore. Consequently, its credit-deposit ratio improved 8 basis points to 0.6.

While the bank managed to bring down its cost of deposits by 95 basis points to 4.54 per cent, yield on advances fell 60 basis points to 8.42.

Retail advances grew an impressive 45.42 per cent to Rs 5,750 crore and now form 31 per cent of total advances against 28.47 per cent last year.

Though the capital adequacy ratio (CAR) of the bank has fallen a whopping 388 basis points to 16.23 per cent on account of a robust growth in credit, it is still higher than the stipulated level of 9 per cent.

 There are no real concerns for the bank, say analysts, as long as it can maintain steady growth in lending and protect its margins. Non-performing assets (NPAs), too, are not much of a concern and CAR is still healthy.  Analysts expect an EPS of Rs 35 for FY06, assuming a growth of 25 per cent y-o-y. The stock now trades at a P/E of 9.8 times its FY06 earnings (trailing 12-month P/E of 12.29).  GUJARAT AMBUJA CEMENTS
Rise in operating costs drags net Gujarat Ambuja Cements (GACL), the country's fourth-largest cement company, reported a net profit of Rs 143.11 crore for the quarter, a drop of 1.46 per cent.  However, net sales improved 19.33 per cent to Rs 667.42. The drop in net profit was mainly on account of a big spike in operating costs, as well as a sharp fall in other income. 

Gujarat Ambuja Cements
(In Rs Cr)	Q4FY05	Q3FY05	% change
Net sales	667.42	559.29	19.33
Other income	8.46	33.34	-74.63
Operating profit	199.11	182.27	9.24
OPM (%)	29.83	32.59	-
Net profit	143.11	145.23	-1.46
NPM (%)	21.44	25.97	-
EPS (Rs)	7.97	9.21	-
Trailing 12-month P/E			17.59

The quarterly figures include those of the erstwhile Ambuja Cement Rajasthan (ACRL). Ambuja Cement Rajasthan merged with GACL with effect from June 1, 2004. Thus the y-o-y numbers are not strictly comparable. However, including ACRL's profit (which was reported separately), GACL