TCS: Beating the Street

Big deals will continue to drive TCS' topline growth

Tata Consultancy Services' March quarter numbers have bettered the Street's expectations in terms of revenue growth which stood at Rs 3732.8 crore, a rise of 8.1 per cent quarter on quarter.

While expenses are up in Q4FY06, the fall in the operating profit margin by about 130 basis points sequentially to 24.85 per cent, is primarily the impact of the rupee appreciation. Adjusted for this, margins have been steady.

For the full year though, TCS has ended up with lower margins of 25.8 per cent on revenues of Rs 13,255 crore, a y-o-y growth of 36.2 per cent.

Thus, volume growth is robust and TCS has been able to ramp up business from its bigger clients "� the number of $50 million clients is up at 9 from 6 in the previous quarter. The company has added 39 new clients during the quarter with a couple of big deals which should continue to drive topline growth.

Utilisation levels are up for the quarter, though net additions have been the lowest this year at just 3,571. Moreover, the attrition rate is nudging 10 per cent from 8.7 per cent in the previous quarter.

Time and material contracts are up to 51.7 per cent from 49.4 per cent in the previous quarter, which is good since it means lower risk for the company and better margins.

The off shore-on site mix at 37.8:62.2 has fallen in Q4FY06, one reason for which is the higher on-site ratio of Tata Infotech. Besides, some of the new accounts too have contributed to the higher on-site ratio.

At the current price of Rs 1900, the stock trades at just over 25 times FY07 estimated earnings while Infosys, at Rs 3230, trades at 29 times FY07 estimates, with the valuation gap persisting.

Gujarat Ambuja

After ACC's solid numbers last week, it is no surprise to see Gujarat Ambuja also report a significantly improved last quarter. The company's stand-alone operating profit has grown by 61.4 per cent y-o-y to Rs 321.3 crore in the March 2006 quarter.

In addition, it was able to grow its operating profit margin by 493 basis points to 34.76 per cent in the March 2006 quarter. The Gujarat Ambuja stock surged 8.3 per cent to Rs 117.75 on Monday, a lifetime high.

Gujarat Ambuja's stand-alone cement sales amounted to 36.5 lakh tonne as compared to 31.9 lakh tonne in the corresponding period of the previous year, thanks to the well document buoyant demand conditions from the housing and infrastructure sector.

In addition, net price realisations for the company are estimated at Rs 2,525 per tonne as compared to Rs 2,079 per tonne a year ago, say analysts.

The company has also seen its freight and forwarding charges rise due to the recent Supreme Court decision banning the overloading of trucks.

Freight charges per tonne for Gujarat Ambuja were estimated at Rs 437 per tonne in March 2006 quarter as compared to Rs 345 per tonne a year earlier, say analysts.

It is understood that the company is planning to enhance the proportion of rail transport in its total cement despatches to better manage rising road freight charges.

Rail transport currently accounts for about 23-25 per cent of its total despatches, while the share of road is 52-55 percent and the remaining is via ships, say analysts.

Going forward, the strong demand for cement is expected to continue into the June quarter. As a result, the company gets a discounting of about 28.8 times estimated June 2006 earnings.

HDFC Bank: Solid show

HDFC Bank has managed to grow its diluted EPS by over 25 per cent y-o-y in the fourth quarter of 2005-06, which is commendable, considering that interest rates have only gone up.

The bank saw a 44 per cent y-o-y increase in net interest income to Rs 739.41 crore and a 47.6 per cent growth in assets in the March 2006 quarter.

Though this was lower growth compared to the 52.4 per cent y-o-y growth in the December 2005 quarter, its performance was in line with analysts' expectations.

The growth in other income at 38.21 per cent during Q4 FY06 to Rs 304 crore, was lower than the 47.7 per cent in the previous quarter, as the increase in short-term yields during the quarter led to loss on sale and revaluation, which reduced other income by almost Rs 87 crore.

The bank saw its retail loan portfolio as well as its low cost deposit base inch up marginally. Advances increased by 48.1 per cent in FY06, with retail assets at 55 per cent of the total loan book at the end of March 2006, up 100 basis points over December 2005.

Low cost deposits as a percentage of total deposits went up from 53 per cent in Q3 FY06 to 55 per cent in Q4 FY06. But a 46.7 per cent rise in operating expenses, on account of both salaries and higher other operating expenses led to the operating profit rising 38.6 per cent. Net NPAs at 0.4 per cent were at the same levels as in Q3 FY06.

The HDFC Bank stock was marginally up after the results, and trades at over 4 times its FY07 book value, which is not cheap.

With contributions from Shobhana Subramanian and Amriteshwar Mathur