TCS: A promising future

Margins have been flat for TCS in July-Sept

Tata Consultancy Services reported financial results for the July-September quarter on Monday, the first time after getting listed.

Profit after tax (before exceptionals) rose 14.1 per cent sequentially to Rs 576.4 crore in the September quarter, on the back of a 13.93 per cent in revenues to Rs 2,430.7 crore.

The profit figure of Rs 576 crore is much higher than most analysts' expectations "" consensus estimates were close to Rs 530-540 crore. Much of the profit growth came from the jump in revenues. Margins, in fact, were flat at 27.5 per cent at the operating level.

This was despite a shift to offshore, higher utilisation and a two per cent depreciation in the average rupee rate last quarter. The reason for this is higher employee costs, which rose by 66 basis points as a percentage sales.

Although TCS does not give any guidance, the fact that it added 52 clients and around 4,000 employees (net) last quarter speaks of bullish expectations of growth in the future.

Analysts are already talking of an EPS of around Rs 46 (consensus was around Rs 42 at the time of the IPO), which should be within reach as it's already done around Rs 22 in the first six months.

TCS vs Infy

TCS's 14 per cent sequential growth in revenues and profit last quarter is more or less in line with Infy's 15 per cent sequential growth. But it's worth noting that TCS's revenues had grown just 4.7 per cent in the June quarter, compared to a 12.4 per cent growth for Infy. So it makes sense to look at results for the six months ended September versus the year ago period.

In the case of TCS, revenues grew 41.8 per cent to Rs 4564.25 crore according to consolidated US GAAP numbers. Infy's revenues according to US GAAP grew 47.3 per cent. Gross profit for TCS grew 42.5 per cent after excluding exceptionals, while Infy's gross profit grew at a higher rate of 49.3 per cent. At the operating profit level (excluding exceptionals), TCS's growth was higher at 60.2 per cent, compared to Infy's 56.5 per cent.

There isn't much that separates the two companies based on growth parameters. Even on the profitability front, TCS has inched closer to Infy. In the six month period, TCS's operating margin rose 320 basis points to 27.6 per cent, about one percentage point lower than Infy's margin of 28.8 per cent.

But there are some other parameters on which TCS still lags behind "" for instance, its debtor days are at 84, compared with just 58 for Infy. Infy sits on a cash pile of over Rs 2,500 crore, while TCS is in a net debt position of Rs 450 crore.

Moreover, while Infy scores extremely high on corporate governance and disclosure, TCS leaves a lot to be desired especially as far as disclosure goes. That could be reason TCS (23.6 times FY05 earnings) trades at a slight discount to Infy (25.6 times FY05 earnings).

Mercator Lines

The Mercator Lines Ltd (MLL) is the first shipping company to declare Q2 results, which more than amply prove the extent the boom in the shipping industry. MLL's September quarter net profit has jumped almost three fold.

It has benefited from vastly improved freight rates for this segment ""- in the case of VLCC, spot freight rates have averaged around $ 59, 400 per day in the September quarter, an improvement of approximately 124 per cent year-on-year.

Also in the case of Suezmax, freight rates in the September quarter have shown an improvement of 127 per cent year-on-year. This jump in rates has enabled the company to grow its shipping income 133 per cent to Rs 124.9 crore in the last quarter.

However, shipping companies have had to bear a sharp increase in staff costs and ship operating expenses. As a result, MLL's staff costs have risen three fold in the last quarter and ship operating expenses have grown 73 per cent.

However, a larger revenue base helped MLL neutralise these cost increases "" operating profit grew 185 per cent to Rs 43.63 crore operating profit margin grew 630 basis points to 35 per cent.

MLL's performance is a preview of other shipping company results, and Great Eastern Shipping and SCI, who also focus on transporting petroleum products, are also expected to report significantly better Q2 results.

For MLL, the superb performance was expected, and its stock has appreciated around 44 per cent over the last month while the NSE's CNX 200 MidCap Index has gained only around 5 per cent.

With contributions by Mobis Philipose and Amriteshwar Mathur