IT bellwethers disappoint

QUARTERLY RESULT ANALYSIS

Tata Consultancy Services
Better productivity enhances margins

TCS's revenues were up just 3 per cent in Q1FY06, with volumes up about 2.5 per cent. The operating margin expanded by 100 basis points to 29.38 per cent. 
 

TCS
(Rs crore)	Q1FY06	Q4FY05	% change
Net sales	2682.3	2603.97	3
Other income	38.72	-42.93	-
Operating profit	788.25	738.84	6.68
OPM (%)	29.38	28.37	100 bps
Net profit	630.62	471.79	33.66
NPM (%)	23.5	18.1	540 bps
EPS (Rs)	13.13	9.83	33.5
Nine-month trailing P/E			32.9

The company has bagged a $100 million order from a global financial services firm, revenues from which have already started flowing in.

Tata Infotech, which does mainly solutions and systems integration, will be merged with TCS in the ratio of 1:2 (two shares of Tata Infotech of Rs 10 paid-up will fetch one share of TCS of Rs 1 paid-up).The merger will give TCS access to several global-500 clients to which it can cross-sell products.

Margins expanded during the quarter despite the onsite component increasing by 3 percentage points, the utilisation going down and offshore salaries being raised. Utilisation fell as there were more people available while the onsite-offshore mix changed in favour of onsite (63:37 from 60:40), primarily due to one particular contract being restructured.

However, margins improved due to productivity improvements "� especially in the fixed-price contracts (FPCs) "� some increase in the number of billed engineers, a rise in billing rates and also lower costs on salaries since there were a high number of recruits at lower levels, including trainees.

The shift of revenues from domestic to international, by about 2 per cent, helped the company shore up margins since the international business is more profitable. In addition to this the domestic business has become more profitable because of the lower component of sales of equipment, which is down from 6 per cent to 4 per cent of revenues.

The management says it has managed to get better billing rates for new clients apart from cases where it has renegotiated contracts with existing clients. With some big deals being closed out, many of them FPCs, the company says the offshore component should go up in the coming quarters.

TCS added 2690 employees during the quarter and its attrition rate was 8.2 per cent. It is ramping up the BPO business which now has 1900 people and plans to increase this to 4000 people in about 18-20 months (the business now contributes just 1 per cent to the company's revenues). The company provided Rs 9 crore for the impact of the fringe-benefit tax.

At the current price of Rs 1,250, the stock trades at 21 times FY06 estimates of Rs 59, which is a reasonable valuation, given that the merger with Tata Infotech could help it scale up operations.

Infosys
Higher costs drag margins

Infosys' revenues for the quarter ended June were up 4 per cent on a sequential basis with volumes up 2.6 per cent, but the operating profit at Rs 663.81 crore was lower compared with the March quarter. 

Infosys
(Rs crore)	Q1FY06	Q4FY05	% change
Net sales	2071.59	1987.32	4.2
Operating profit	663.81	666.71	0.4
OPM (%)	32	33.5	-150bps
Net profit	532.07	513.48	3.6
NPM (%)	25.6	25.8	-20bps
EPS (Rs)	19.63	18.46	6
12-month trailing P/E			32.27

Consequently, the operating margin fell 150 basis points. The fall in the margins was a combination of higher costs and a drop in average price realisations.

Salary hikes which were in the region of 13-15 per cent for offshore and 3 per cent for onsite employees pushed up costs. Investments for visa applications, normally made during the June quarter, too, have inflated costs and have impacted margins. Adverse currency movements (the rupee appreciated around 5 per cent against the pound and the euro) also had a negative impact.

The March quarter saw unusual expenses such as provisions for doubtful loans and advances and provisions for post-sales client support and warranties which totaled Rs 24.4 crore. This head of expense was much lower in the June quarter at Rs 1.64 and thus the drop in the margin would be higher at 265 basis points. Attrition was higher at 16.1 per cent compared with 11.2 per cent in the March quarter and the company has added 3056 employees during this quarter.

The company has revised its guidance upwards for FY06 with revenues expected to grow 26-27 per cent. The EPS before exceptional items is expected to be between Rs 84.70 and Rs 86, a growth of between 23 and 25 per cent.

While the current quarter has been somewhat disappointing, at the current price of Rs 2,195, the stock is trading at 23 times estimated FY06 earnings which appears reasonable.

ACC
Growth in cement volume enhances profit

Cement major ACC reported a 71.56 per cent rise in net profit for Q1FY06 at Rs 139.36 crore. This has come on the back of a 19.02 per cent jump in net sales at Rs 1,128.25 crore. 

ACC
(Rs Cr)	Q1FY06	Q1FY05	% change
Net sales	1128.25	947.93	19.02
Other income	41.51	-10.82	483.64
Operating profit	213.3	162.1	31.59
OPM (%)	18.91	17.1	180 bps
Net profit	139.36	81.23	71.56
Net margin	12.35	8.57	378 bps
EPS (Rs)	7.49	4.39	70.62
Trailing 12-month P/E			19

The improved performance has been achieved as a result of robust volume growth in the cement division as well as a 2 per cent improvement in net realisations.

Cement division sales grew 16.19 per cent to Rs 981.39 crore as volumes improved 13 per cent. ACC's other business segments like refractory and ready mix concrete also posted good growth of 50.23 per cent and 26.92 per cent respectively.

Raw material costs went up 16.68 per cent to Rs 171.45 crore, mainly due to higher coal prices. However, the company was able to keep a tight leash on power and fuel costs, which declined marginally to Rs 205.92 crore. Outward freight costs went up 36.61 per cent to Rs 173.74.

There was an improvement of 180 basis points in operating profit margins to 18.91 per cent, while net margins improved 378 basis points to 12.35 per cent.

There was a big gain in other income at Rs 41.51 crore, which contributed to the profit growth.

Depreciation was higher by 9 per cent at Rs 48 crore, mainly on account of acquisition of Wadi captive power plant from Tata Power (in July, 2004) and commissioning of a 15 mw captive power plant in Chaibasa.

In keeping with its policy of exiting from its non-core business, the company has decided to sell its refractories business for Rs 257 crore to ICICI Venture Funds. Analysts note that this transaction will free up capital for the cement division and is expected to contribute Rs 220 crore to revenues in FY06.

In FY06, post-merger with Bargarh Cement and Damodar Cement & Slag, analysts expect ACC's cement volumes to grow 12 per cent and realisations to rise 3 per cent. In addition, the commissioning of a 15 mw power plant at Chaibasa will keep power costs under control.

The anticipated pick-up in cement prices post-monsoon is expected to help the company improve its operating margins. The cement industry recorded a growth rate of around 11 per cent for Q1FY06 compared to 2.70 per cent in the corresponding previous period.

According to the company, the projected demand growth of around 8 per cent with no new significant capacity addition in the pipeline should lead to stable to improved cement prices. At a trailing 12-month P/E of 19x, the stock is considered to be fairly valued.

HDFC BANK
Asset growth props net

HDFC Bank maintained its standard 31 per cent growth in earnings in the June quarter, too. 

HDFC Bank
(Rs crore)	Q1FY06	Q4FY05	% change
Interest earned	894.13	702.55	27.27
Other income	263.55	108.04	143.94
Total Income	1157.68	810.59	42.82
Interest expended	370.44	303.76	21.95
Net interest income	523.69	398.79	31.32
Operating expenses	358.01	230.83	55.1
Total expenses	728.45	534.59	36.26
Provisions and contingencies	165.85	69	140.36
Net profit	183.53	139.97	31.12
EPS (Rs)	5.6	4.5	24.44
Trailing 12-month P/E			29.4

But the difference was that an outstanding growth in operating profit was marred by an abnormal increase in provisions and contingencies. The higher operating profits were driven by strong asset growth.

Net interest income was at Rs 523.69 crore, 31.3 per cent higher than the same quarter in the previous year. Core net interest margins were up marginally at 3.9 per cent but the primary driver was asset growth. Average asset growth during the period was 27.3 per cent.

The bank's operating profit was up 55.10 per cent on a year-on-year basis. On a sequential basis, too, operating profit grew by 6 per cent.

While net profits growth was 31.1 per cent y-o-y, there has been a decline compared to the March quarter. That's because of provisions and contingencies, which rose from Rs 107 crore to Rs 165 crore. Most of that increase is due to higher general and specific loan loss provisions, which have almost doubled compared to the March quarter. The company says that's because of a shift in the mix of advances, with an increase in the share of personal loans and credit-card dues, which attract higher general provisions.

Retail loans grew 71.8 per cent to Rs 14,761. They accounted for 50.5 per cent of gross advances compared to 45.2 per cent in FY04.

While the funds from the ADS issue have powered asset growth in Q1, the bank's deposit growth, at 22.1 per cent y-o-y, is well below that of its 39.6 per cent growth in customer assets.

Going forward, obviously, deposit growth will have to be higher to match the bank's asset growth. the bank's capital adequacy ratio stood at 12.2 per cent. At the current price of Rs 630, the stock trades at 29.4 times trailing 12-month earnings of Rs 22.9. Analysts continue to be bullish on the bank.

HDFC
Profits grow steadily, but NPAs rise

HDFC posted steady growth in revenues and profits for the June quarter, driven by good asset growth. 

HDFC
(Rs crore)	Q1FY06	Q4FY05	% change
Income from operations	932.5	761.17	22.51
- Interest on loans	760.67	590.68	28.78
- Fees	13.87	25.76	-46.16
- Dividend income	46.6	38.13	22.21
- Profit on sale	18.71	13.8	35.58
- Income from lease	28.06	37.24	-24.65
- Other operating income	64.64	55.56	16.34
Other income	2.21	1.91	15.71
Total income	1867.26	1524.25	22.5
Interest expended	566.86	464.46	22.05
- Staff cost	22.04	16.59	32.85

Total revenues increased by 22 per cent while profit before tax was up 24 per cent. Net profit was up 21 per cent. The strong performance came on the back of a strong asset growth of 26 per cent.

HDFC's interest from loans grew at 28.78 per cent to Rs 760.67 crore. However, declines in fee income and income from leasing operations dragged down growth in operating income which grew by 22.51 per cent.

Fee income declined 46.16 per cent, probably because of competitive pressures, forcing mortgage players to cut on admin fee, etc. Income from lease was also down from Rs 37.24 crore last quarter to Rs 28.06 crore.

Net interest income rose 53.55 per cent from 126.22 crore to Rs 193.81 crore.

HDFC's total assets grew 26 per cent from Rs 33,749 crore to Rs 42,691 crore. Loan growth was robust with approvals rising 30 per cent and disbursements climbing 28 per cent. The loan portfolio at the end of the FY05 amounted to Rs 39,081 crore against Rs 30,246 crore in FY04, representing an increase of 29 per cent.

There has been a sharp rise in non-performing assets. As at end-March this year, under the 90-day overdue norm, NPAs amounted to 1.10 per cent, and 0.84 per cent under the six-month overdue norms. As on June 30, 2005, NPAs under the 90-day norm were 1.74 per cent, while they were 1.26 per cent under the six-month past due norms.

HDFC's capital adequacy ratio is adequate. It stood at 14.6 per cent of the risk weighted assets, against the minimum requirement of 12 per cent. Tier 1 capital adequacy was 11.8 per cent against a minimum requirement of 6 per cent.

Despite rising competition, HDFC has been able to maintain its steady steam of revenues and earnings. At Rs 890, the stock trades at 23.12 times it trailing 12 month earnings, and quotes at 5.4 times book value, which is a very high valuation.