TCS: Playing spoilsport

Muted revenues drag down operating margins and net profits in Q4FY08.

If Infosys, Wipro and Satyam tried to convince the street that things were not that bleak for the technology space, TCS has all but undone the good work.

Revenues for India's largest software exporter grew just 3 per cent sequentially in the March 2008 quarter with project delays for three US banks and a cancelled order.

What's more with TCS not billing engineers for a couple of new big projects""large deals often operate that way-- price realisations were lower resulting in a fall ebit margins (earnings before interest and tax) of 140 basis points to 22.8 per cent.

The shocker was the 6 per cent fall in sequential earnings, the result partly of lower foreign exchange gains.On the bright side, the Rs 22,861 crore TCS seen low attrition and balanced growth across geographies.

Also, it has said it will hire 30,000-35,000 people in FY09, a decent number, but which only indicates confidence in the revenue flow, not profit margins.

While the June quarter will be a weak one for all players "" given the wage hikes "" for TCS the problems could continue into the year because of its high exposure to Wall Street clients. The bright spot that it continues to win large deals""it bagged six in the March quarter.

While TCS missed the street's expectations, numbers for Infosys and Wipro were in-line while Satyam surpassed expectations.

That could mean that larger players are feeling the impact of a high base while TCS is bearing the brunt of a high exposure to banking and financial sector clients "" Satyam has the least exposure. At Rs 887, the TCS stock trades at 15.5 times estimated FY09 earnings.

While the technology space is likely to face challenges for most of the current year given the imminent recession in the US, Infosys with its superior margins and execution, is likely to be the best performer in the sector followed by Satyam which has managed to sustain growth momentum.

TCS, which should see FY09 net profits grow by just about 14 per cent from Rs 5,019 crore in FY08, should perform in line with the market.

Biocon: More catalysts needed

The Rs 1054 crore Biocon's consolidated operating profits may have grown just 5.7 per cent to Rs 299 crore in FY08 with the operating margin down 30 basis points to 28.4 per cent.

But the street wasn't expecting very much more, possibly because they anticipated that the appreciating rupee would hurt revenues.

Also, the FY08 numbers are not strictly comparable with those for FY07, because profits were boosted by the sale of the enzyme division.

Adjusted for the sale, the profit before exceptional items rose 13 per cent to Rs 225 crore while revenues grew 19 per cent.

The Bangalore-based pharma firm's business during the year was characterised by moderate growth of just 12 per cent in its key bio-pharma division""which contributed nearly 79 per cent of FY08 sales.

Only when company gets regulatory approvals to launch categories like insulin abroad, can growth gain momentum. The contract research business, which chips in about 17 per cent of sales, showed some traction growing 29 per cent.

However, higher R&D related expenses "" up 26 per cent at Rs 48 crore "" has resulted in margin pressures. The management , however, believes the investment will pay off. Going ahead, Biocon plans to leverage the acquisition of a 70 per cent stake in Germany-based AxiCorp for ¤30 million.

AxiCorp, which markets and distributes generics and allied medical products in western European markets, posted sales of ¤75 million for the 12 months to December 2007.

The Biocon stock came off from Rs 552 intra-day high to close at Rs 509; at this price it trades at 19 times estimated FY 09 earnings and near-term upsides appear to be factored in.