Tata Consultancy Services posts 8 pct rise in Q2 profit

Source : REUTERS
Last Updated: Thu, Oct 13, 2016 18:47 hrs
TCS

Tata Consultancy Services Ltd (TCS), India's biggest software services firm, posted a rise in quarterly profit beating estimates but its outlook remains subdued due to uncertainty surrounding the U.S. elections and Britain's decision to leave the European Union.

Net profit rose 8.4 percent to 65.86 billion rupees ($989 million) in the three months to end September, compared with a profit of 60.73 billion rupees in the same period a year earlier.

That compares with a consensus estimate of 62.93 billion rupees drawn from 23 analysts polled by Thomson Reuters I/B/E/S.

TCS warned in September that its financial sector clients were holding back on discretionary spending. The United States is the biggest market for India's more than $150 billion software outsourcing sector, followed by Europe.

($1 = 66.5919 rupees)

View from Emkay Global Research:

TCS (HOLD, CMP Rs 2,354, and TP Rs 2,350) Sep'16 Quarter Results:  Subpar revenue performance, margins boosted by lower share of India/ Equipment Sales

TCS's Sep'16 quarter results have missed expectations on revenue growth with company's 1% QoQ c.c revenue growth being the lowest sequential growth in the company's reporting history in an otherwise usually strong period. Per management, macro volatility, softness in Financial Services and delays in India business impacted growth (adjusted for lower revenues of US$ 27 mn in India, company's international business growth was also tepid at 0.7% QoQ in US$ terms). We note that a superior margin performance would have been helped by lower contribution from India.

While management remains prudent and watchful, initial comments indicate that they expect H2 to be better than the usual years (well in our view, this is still a hope!).

We continue to believe that the sector (including TCS) continues to face a mix of structural and cyclical changes which is resulting in a very tough FY17 for the industry as a whole. While TCS's revenue estimates will get cut a tad, FY17/18E EPS at ~Rs 128/141 might get a tad boosted driven by Q2 beat (our estimates are ~4% lower than consensus).  We would expect a modest negative reaction to these results in trade tomorrow.

We currently have a HOLD rating on TCS with a TP of Rs 2,350.

Sep'16 quarter results highlights:

  • Revenues at US$ 4374mn (0.3% QoQ, 5.2%YoY) lower than our estimates (Emkay est: +2.1% QoQ) as well as consensus estimates of 1.8% QoQ US$ revenue growth. This marks the slowest sequential revenue growth in the September quarter in company's reporting history. Per management, revenue growth was impacted by delay in India business (US$ 27 mn), however we note that International business (ex-India) was also tepid at 0.7% QoQ in US$ terms.

  • EBIT margins improved by ~90bps QoQ to 26% (V/s Emkay expectations of 24.7%) led largely by gross margin improvement of ~90 bps QoQ. We note that margin improvement would also be aided by lower share of India business.

  • Reported Profits at Rs 65.9 bn (+4.3% QoQ, +7.7% YoY higher than Emkay estimates of Rs 60.8bn) aided by higher than estimated other income ( forex gains of Rs 3.9 bn) and higher margins despite revenue miss.

  • Company has declared an interim dividend of Rs 6.5/share similar to the June'16 quarter.

  • Digital business at 16.1% of revenues in Sep'16 quarter grew by 1.5% QoQ.

Operating metrics performance at a glance:

Volumes

  • Volumes: 1.3% QQ and 8.5%YY.

Growth by Verticals (all in constant currency terms)

  • Financial Services: 1.2%QQ

  • Manufacturing: 3.1%QQ

  • Telecom: 2%QQ

  • Retail: -3.1%QQ

Growth –Service line wise (all in constant currency terms)

  • App Development & maintenance: +0.9%QQ

  • Infra Services: 2.1%QQ

  • ERP: 2%QQ.

  • BPO: 2.5%QQ

Growth by Geographies (all in constant currency terms)

  • US: 1.4%QQ

  • UK: -0.1%QQ

  • Continental Europe: +3,7% QQ

  • India: -7.6% QQ

  • APAC: +3.5% QQ



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