TCS: A fine blend

Mixing its onshore-offshore business well, TCS has emerged an outperformer

Despite some damage from the appreciating rupee that hit the operating profit margin (OPM) by about 140-160 basis points, TCS has managed sequential expansion in the OPM of 90 basis point at 28.3 per cent in the December quarter.

While the OPM is lower than that of Infosys, which posted an OPM of close to 33 per cent, it is nonetheless good. Revenues, in rupee terms, grew at 8.4 per cent sequentially to Rs 4,860.5 crore, while in dollar terms, they were up 12.5 per cent sequentially.

On an average, blended billing rates for Time and Materials and Fixed Price contracts were up around 2.5 per cent. The improved margins have been driven by a better offshore-onsite ratio with the share of the offshore business going up by 60 basis points to 41.6 per cent, a better business mix and better execution.

TCS has also managed to bring in economies of scale: selling, general and administration (SG&A) to sales was down 60 basis points at 19.2 per cent. However, utilisation (excluding trainees) during the quarter was down 120 basis points at 78.2 per cent.

With the company bagging more large orders "� in this quarter, it has closed out two $100 million deals and five $50 million deals "� it should be able to scale up operations significantly. TCS is clearly able to mine its clients faster "� the number of $20 million clients went up to 37 in Q3 FY07 from 32 in the previous quarter.

At the same time, the contribution of the top-ten clients to revenues has not increased significantly. It has moved up by just 70 basis points this quarter. The company has acquired 55 new clients in the quarter, and the management says the pricing environment is good with contracts being renewed at higher rates of 3-5 per cent.

While the bread-and-butter application development and maintenance segment continued to bring in the chunk of revenues at 53.5 per cent, the management says even within the segment, the quality of business has improved. The share of the high value-added service, global consulting, has remained flat at 3.4 per cent.

The banking and financial services vertical continues to fetch the company the biggest chunk of revenues at 43.5 per cent. At the current price of Rs 1,328, the stock trades at a multiple of 25 times to estimated FY08 earnings and should be an out-performer.

Sterlite Industries: Metallic sheen

For Sterlite Industries, it was a bumper quarter with a 94 per cent y-o-y consolidated sales growth to Rs 6,814.29 crore and a 214 per cent increase in operating profit to 2,762.76 crore.

Net profit went up 226 per cent to Rs 1,896 crore. This spectacular growth came about, thanks to buoyant prices of aluminium and zinc and also helped by higher volumes.

As a result, its operating profit margin increased 1,562 basis points to 40.54 per cent. According to analysts, on a y-o-y basis, average aluminium prices were up 31 per cent y-o-y to $2,717 a tonne during the December quarter.

Average zinc prices were up to $4,190 a tonne levels in the December 2006 quarter, a 179 per cent y-o-y increase. Net profit growth for the standalone company, which manufactures copper, was up 43 per cent.

Aluminium volumes went up 75 per cent y-o-y to 89,000 tonne, while refined zinc production increased by 35 per cent to 93,000 tonne. Copper cathode production was up 15 per cent y-o-y to 86,000 tonne, thanks to increased capacity to 400,000 tonne from 300,000 tonne.

Mined copper metal content was 12 per cent lower due to a planned closure at its Thalanga mines.

There has been some pressure on the TC/RC (treatment and refining charges) have been down to 15 cents per pound at East Asian smelters, which will put pressure on Sterlite's copper margins too.

However, aluminium demand remains strong, though the supply is likely to increase due to new capacities coming up. But analysts expect profitability to improve due to scale.

The Sterlite stock closed slightly lower on Monday at Rs 540, and trades at an attractive 6 times estimated FY08 earnings.