IT behemoths beat the street

RESULTS REVIEW/ QUARTERLY RESULT ANALYSIS: December 2004

Trailing 12-month P/E31.31  However, its revenue guidance stands reduced at 46 per cent y-o-y (from 47-48 per cent) due to the uncertainty surrounding the rupee.  

Other income rose a hefty 58 per cent, mainly due to an infusion of Rs 20 crore arising from foreign exchange differences.

Operating margins and net margins moved up 88 basis points and 94 basis points respectively. Although SG&A (selling, general and administrative) expenses rose 1.72 per cent on an absolute basis, it slipped 76 basis points as a percentage of sales, mainly led by a 70-basis-point fall in selling and marketing expenses.

The proportion of revenues from the software development offering (accounting for about 22 per cent of revenues) slipped to 22.1 per cent from 25.1 per cent while that from package implementation, maintenance and consulting offerings witnessed a rise.

The company has added 38 clients and 2,280 employees in the quarter. It plans a gross addition of 2,000 employees in the March quarter.

The number of million dollar clients rose to 156 from 146. Revenues from the top client fell by 4.47 per cent while the contribution of the top five and 10 clients to revenues witnessed a decline.

 At Rs 1,976, the stock trades around 21 times its FY06 EPS estimates. Analysts are upbeat on the stock.  "We foresee strong growth going forward. The fact that the stock remains one of the best plays in the sector, combined with the high visibility that the company enjoys, plays out to its advantage in the future," says Nimesh Chandan, IT analyst at Stratcap Securities. Analysts peg an EPS of Rs 92 for FY06.  TCS
Higher other income enhances bottomline  TCS announced results that beat street expectations. The company announced handsome topline and bottomline growth of 6.08 per cent and 23.06 per cent respectively. The bottomline was bolstered by higher other income, a huge chunk of which came from forex gains.

TCS
(Rs crore)	Q3FY05	Q2FY05	% Change
Net sales	2578.44	2430.73	6.08
Other income	104.08	-0.76	-
Operating profit	738.46	676.71	9.12
OPM (%)	28.64	27.84	0.80
Net profit	709.34	576.40	23.06
NPM (%)	27.51	23.71	3.80
EPS (Rs)	14.77	12.01	-
Trailing 12-month P/E			-

Measures to control expenses and a favourable onsite-offshore mix resulted in an 80-basis-point increase in operating margin. Net margin, meanwhile, shot up by a handsome 380 basis points.
 

Other income zoomed exponentially to Rs 104 crore from a negative Rs 76 lakh in the preceding quarter. Of this, Rs 78 crore have been on account of forex gains.

Cost of revenues fell 255 basis points, thanks to lower employee costs which fell 247 basis points. SG&A expenses rose 175 basis points while equipment and software expenses slipped 53 basis points.

Offshore revenues rose at a faster clip with a 13.15 per cent growth compared with a 1.8 per cent growth in onsite revenues. However, the company still has a high proportion of onsite revenues at 60 per cent.

Revenues from the key segments of application development and maintenance (72.10 per cent of revenues) and enterprise solutions (22.10 per cent) have slipped marginally.

Revenues from the top 5 and 10 clients witnessed a slight decline. The company added 72 new clients in the quarter against 52 in the September quarter, taking the total client base to 506.

GE, the largest customer of TCS, contributed to 14.8 per cent of the company's consolidated revenues, down from 15.9 per cent in the previous quarter.

 Although the company's bottomline growth was impressive, a section of analysts feels that the topline growth could have been slightly better.  They feel that the decline in contribution from GE seems to indicate a possible derisking of the company