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TCS (HOLD, CMP Rs 2,302, TP Rs 2,420) Mar’17 Quarter Results

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 Weak revenue performance in Financial Services/US contrary to expectations; commentary awaited
TCS’s Mar’17 quarter results are a tad short on revenue front with a 1% QoQ c.c revenue growth (V/s our estimates of 2% QoQ c.c revenue growth). EBIT margins are broadly in line with Emkay/Consensus estimates at 25.7 %( down 30 bps QoQ). Net profit beat is largely driven by higher other income/forex gains. TCS has announced a final dividend of Rs 27.5 taking the total dividend payout to Rs 47/share
We are more surprised by the weak revenue performance in Financial Services (-0.4% QoQ in c.c terms), Retail (-3% QoQ in c.c terms) and North America (-1.8% QoQ) especially in the context of management’s indication of buoyant spending trends in US Financial Services clients (will wait for management clarification on this). TCS’s weak revenue performance in US and Financial Services on the back of Infosys’s commentary will certainly dent confidence on pick up in spending in the Financial Services space in FY18 and we await more qualitative commentary on this front.
TCS seems to be sticking to its EBIT margin band of 26-28% despite the miss in FY17 (FY17 EBIT margins at 25.7%) and recent INR appreciation challenges.
We do not see material changes to our FY18/19E EPS of Rs 140/ 152. We currently have a HOLD rating on TCS with a TP of Rs 2,420.  At CMP of Rs 2,302, TCS trades at ~16.5x/15.2x FY18/19E P/E.
Mar’17 quarter results highlights:
  • Revenues at US$ 4,452 MN (+1.5 % QoQ, 5.8%YoY) is lower than our/consensus estimates (Emkay est: 2.2% QoQ, consensus: 1.7% QoQ). Constant currency revenue growth was 1% QoQ (V/s Emkay estimate of 2% QoQ).
  • EBIT margins declined by 30 bps QoQ to 25.7% (inline with Emkay expectations of 25.7%). Gross margins has increased by 50 bps QoQ while SG&A expenses have increased by 80 bps QoQ to 17.6%, highest since June’14 quarter
  • Reported Profits at Rs 66.1bn (-2.5 % QoQ, +4.2% YoY) higher than  Emkay estimates of Rs 62.9bn) aided by forex gains of Rs  2 bn  and higher other income
Operating metrics performance at a glance:
Volumes
  • Volumes: 1.7% QoQ and 7.6%YY
Growth by Verticals (all in constant currency terms)
  • Financial Services: -0.4%QQ
  • Manufacturing:  1.7%QQ
  • Telecom: 7.4%QQ
  • Retail: -3%QQ  
Growth –Service line wise (all in constant currency terms)
  • App Development & maintenance: 2.1%QQ
  • Infra Services: -2.8%QQ
  • ERP:  0.1%QQ.
  • BPO:  +4.2%QQ
Growth by Geographies (all in constant currency terms)
  • US: -1.8%QQ
  • UK: 4.1%QQ
  • Continental Europe: 7.1% QQ
  • India: +9.3% QQ
  • APAC: +1.9% QQ
TCS Mar’17 result snapshot:
In Rs mn
Q4FY17A
Q3FY17
QoQ(%)
Q4FY16
YoY(%)
Q4FY17E
Net sales US$ Mn
4,452
4,387
1.5
4,207
5.8
4,482
Net sales INR Mn
2,96,420
2,97,351
-0.3
2,84,486
4.2
2,98,944
Operating expenses
2,15,090
2,15,060
2,05,418
2,16,985
EBITDA
81,330
82,291
-1.2
79,068
2.9
81,959
Margins (%)
27.4
27.7
-20.0
27.8
            (40.0)
27.4
Depreciation
5,060
4,960
4,949
5,013
EBIT
76,270
77,331
-1.4
74,119
2.9
76,945
Margins (%)
25.7
26.0
-30.0
26.1
25.7
Other income
9,890
11,850
9,051
6,400
Pre-tax profit
86,160
89,181
-3.4
83,170
3.6
83,345
Tax provided
19,940
21,040
19,702
20,003
Profit after tax
66,220
68,141
63,468
4.3
63,343
Emkay Net profit
66,080
67,781
-2.5
63,408
4.2
62,993
EPS
33.5
34.4
-2.6
32.2
4.2
32.0
Source: Company, Emkay Research.

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