Moneycontrol
Apr 19, 2017 09:58 AM IST | Source: Moneycontrol.com

TCS' positive commentary masks a poor show

TCS surprised the Street with a positive commentary post results although the numbers in the final quarter of FY17 failed to make an impact.

 
 
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Madhuchanda Dey
Moneycontrol Research

TCS surprised the Street with a positive commentary post results although the numbers in the final quarter of FY17 failed to make an impact.

Result Snapshot

Revenue at USD 4.45 billion in Q4 of FY17 grew by 1.5 percent in dollars and 1 percent in constant currency. This was on account of 1.7 percent volume growth and 0.7 percent drop in realisation. Revenue in Indian currency de-grew marginally for the quarter and the 80 basis points sequential decline in margins to 25.7 percent was a tad disappointing. After-tax profit fell 2.5 percent to Rs 6608 crore. Other than BFSI (banking financial service & insurance) and retail which de-grew during the quarter, other verticals grew by 3.8 percent.

For FY17, reported dollar revenue of USD 17.57 billion exhibited 6.2 percent growth. Constant currency growth for the fiscal stood at 8.3 percent - with 8.5 percent growth in volume and marginal decline in realisation. Amid large-scale pricing pressure, the flat realisation points to new offering gaining traction. Operating margin declined 80 basis points to 25.7 percent.

TCS

One of the important takeaways from the numbers was the share of digital revenue. At USD 3 billion in FY17, it grew 28.8 percent and constituted 17 percent of revenue. In fact, the share of digital in Q4 FY17 revenues stood at 17.9 percent.

Each and every geography grew during the year although in the fourth quarter both North America and Latin America de-grew.

Should investors be looking at close to double-digit constant currency growth in FY18?

While the reported numbers weren’t stellar, the tone and commentary from the management was surprisingly positive, especially in the backdrop of multiple headwinds like the tectonic shift in technology and rising protectionism in key markets.

The company management mentioned that the weakness in the key vertical of BFSI for the quarter was transitory and was on account of a project completion in the previous quarter. The deal pipeline in this vertical is healthy with several small deals in banking and financial services and a few large deals in insurance.

There is an increase in deal size of digital projects. While deal finalisation is still tardy, there is overall positivity amongst clients. So, the delay is more to do with timing rather than any directional change.

The company sounded a lot more confident in going back to the operating margin band of 26-28 percent (which slipped to 25.7 percent in FY17). Other than retail (where the slowdown is more structural), the company is expecting decent traction in others that should support revenue. It expects some improvement in erstwhile problem areas like – Diligenta (subsidiary in the UK), geographies like Japan and Latin America. TCS is also looking at improving productivity. We are comforted by the management’s confidence about raising the target for margins and clarity about the levers to achieve the same.

Interestingly, the company added 33,380 people in FY17 – the net addition of 9.4 percent is in fact higher than the constant currency growth and could be due to management’s confidence in achieving better revenue growth in FY18.

Like its peer Infosys, TCS, too, has articulated a dividend distribution policy. In FY17, in addition to the buyback of close to Rs 16,000 crore, the company also paid dividend of close to Rs 47 per share. If we combine the two, the payout yield works out to 5.6 percent. The company mentioned that in future the total dividend payout would not fall below 80 percent of free cash flow minus cost of acquisition.

On the contentious issue of US visas, the management didn’t sound overly nervous although it mentioned taking mitigating steps to keep costs under control.

The new CEO hasn’t overall disappointed in his debut quarter. The stock has significantly underperformed the market in the past one year – down 8.6 percent as against 16 percent rise in the benchmark.

The decent dividend, more confident outlook and an undemanding valuation of 15.9x FY18 projected earnings should protect the downside in the near-term. Currency depreciation, lesser incremental noise from US and sequential improvement in execution could open up the possibility of an upside for investors.
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