TCS: In line with the Street

TCS has just about managed to maintain operating profit margin

Technology major TCS has just about met the Street's expectations for the March quarter. The top line has grown by 5.88 per cent q-o-q to Rs 5146.4 crore; though the growth in dollar terms has been better at 8 per cent q-o-q. Infosys had seen only a 5.1 per cent q-o-q revenue growth in Q4 FY07 in dollar terms.

Thus, for FY08, TCS has seen a revenue growth of 40.7 per cent y-oy to Rs 18,633 crore.

While TCS has been able to cash in on the demand for off-shoring and ramp up orders from bigger clients""-volume growth has been 6.42 per cent while the billing rate has gone up by just about 90 basis points in the March quarter""- it has been able to do so only at a cost: the EBIT (earnings before interest and tax) margin has fallen by about 50 basis points.

Moreover, the Mumbai-headquartered company has just about managed to maintain operating profit margin at 28.3 per cent.

While the company took a hit of 57 basis points on account of the appreciation of the rupee, selling and general administration costs have risen by about 40 basis points.

The utilisation during the quarter has been a decent 75 per cent (including trainees) the retention has been one of the highest in the industry, and the attrition at 11.3 per cent is possibly the lowest among peers; Infosys' attrition is far higher at 13.7 per cent.

However TCS will incur a wage increase of 13-15 per cent on offshore wages in FY08.

At the current price of Rs 1280, the stock trades at just under 23 times estimated FY08 earnings and commands a slightly lower valuation than that of Infosys which trades at around 25 times FY08.

Essar Global: A global pitch

Essar Global, the parent of Essar Steel, is making an aggressive move in the booming North American market for supplying auto-grade steel via its acquisition of the Canada-based Algoma Steel. Essar Global is paying $1.63 billion for this acquisition which is about 0.96 times Algoma's consolidated CY06 sales.

On an enterprise value to operating profit for the year ended CY06, this acquisition is at about 4.5 times. In contrast, Tata Steel had earlier acquired the UK-based Corus (which also has a significant focus on the European auto-grade steel market) on an EV/EBITDA basis for the 12-month ended September 2006, at about 9 times. Of course, Corus' capacity size at nearly 18 million tonnes, is significantly much larger than that of Algoma.

The Canadian company's steel shipments amounted to 2.4 million tonnes in CY06, with an overwhelming majority focused on auto-grade steel products segment.

The deal values the Canadian company on an EV/tonne at about $670 a tonne level, while Tata's had earlier valued Corus on an EV/tonne at about $700-710 a tonne levels. This acquisition helped the Essar Steel stock rise 1.6 per cent to Rs 41.2 on Monday.

It is understood that Algoma already has long term contracts for key inputs "" for instance, it has a 15-year coal-supply agreement and a seven-year contract for iron ore.

Clearly, for Essar Steel, synergies with Algoma will not only help it to move up the value chain in the key North American market, but also help minimise the impact of the cyclical nature of the steel industry. Essar Steel had sold 2.47 million tonnes of steel in FY06, with exports amounting to about 27.9 per cent of the total sales.

The key export markets of Essar Steel are understood to be mainly in Europe and the Middle-East.

With contribution from Shobhana Subramanian and Amriteshwar Mathur