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Last Updated : Apr 20, 2018 12:39 PM IST | Source: Moneycontrol.com

Bullish on TCS, see 30% upside in FY19: Akash Jain

"We are bullish on Tata Consultancy Services and expect sunshine to return in this counter. We expect a 30 percent upside by FY19 end," says Akash Jain, Vice-president, Equity Research at Ajcon Global Services.

 
 
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Akash Jain

We are bullish on Tata Consultancy Services and expect sunshine to return in this counter. We expect a 30 percent upside by FY19 end.

After 12 quarters, TCS witnessed double-digit growth in dollar revenue in Q4FY18. The management was confident of sustaining this growth rate in the coming quarters. The outperformer among verticals was retail and consumer products which posted a growth of 6.4 percent on a sequential basis. The segment has been a laggard in three of the last six quarters.

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On a constant currency basis, the company posted a sequential growth 1.3 percent, largely driven by volumes (up 1.6 percent), even as it continues to face pricing pressures. It added 94 customers in the December-ended period.

Earnings before interest and Tax (EBIT) increased 4.7 percent sequentially (up 6.8 percent YoY) to Rs 8,147 crore during the quarter, up from Rs 7,781 crore in previous quarter. Margin for the quarter improved by 20 basis points to 25.4 percent, against 25.2 percent in December quarter, but declined 30 basis points YoY. It was impacted due to higher employee expenses and selling, general and administration cost.

"Disciplined execution delivered an all-time high cash conversion in Q4. With revenue growth improving, and our digital business scaling up, we expect margins to remain in a stable range," V Ramakrlstman, Chief Financial Officer said.

The company’s net profit and revenue in the quarter beat the Street estimates, while margin growth was slightly below the industry’s expectations, owing to cross-currency volatility. In the March quarter, the company’s net profit stood at Rs 6900 crore, a 4.7 percent year-on-year growth rate and 5.71 percent sequential growth.

TCS’s revenues at Rs 32075 crore grew 8.2 percent y-o-y and 3.8 percent quarter-on-quarter, backed by 2 percent growth in volumes (billed man-hours in the quarter). The management is more optimistic about BFSI and the US market in FY19.

The company’s investments in digital were paying off, and challenges in its largest businesses- banking, financial services and insurance and retail- will not continue into the next financial year. All industry verticals - with the exception of BFSI- grew above company average, with three verticals growing in double digits YoY. In the first nine months, they hired around 3,600 people as against 24,000 people (in the same period) last year. They are going very slow on hiring to maintain margins.

N G Subramaniam, chief operating officer at TCS, said the company would see revenue accrual from deals from Rolls Royce, Marks & Spencer and Nielsen from the fourth quarter beginning January.

Last month, TCS renewed USD 2.25-billion contract from television rating firm Nielsen and won a mandate with British engine maker Rolls Royce to work jointly in digital engagements.

"New deal ramp-ups, increasing traction in digital, robust demand pick up in retail and continuing momentum in most of our industry verticals gave us strong volume growth in a seasonally weak quarter. Our reputation for superior execution, combined with our platform capability, positions us well to close mega deals," Subramanian said in a statement.

The company’s retail segment had bottomed out and was seeing a turnaround in banking, financial services and insurance (BFSI) vertical with demand coming back from clients. How the revenues from this segment moves will be critical as it contributes a third to overall revenues and is by far the largest of its verticals.

The management was cautious about banking and financial services prospects in the US, its largest market. It believes it will take a couple of quarters before there is clarity on investments by the larger financial institutions. The firm has seen growth faster from Europe, largely with spending from banking customers in the region, which could make it the biggest market for TCS after the United States.

TCS also announced a 1:1 bonus of shares and a dividend of Rs 29 a share, taking the total payout to shareholders at Rs 50 for the year. It has paid about Rs 26000 crore to shareholders in dividends and bonuses in 2017-18. The company maintained its margins guidance target band of 26-28 percent for 2018-19, led by recovery in revenues coupled with accelerated growth in digital business.

Compared to TCS, rival Infosys’s net profit and revenues grew 2.4 percent and 5.6 percent, respectively, year-on-year. Sequentially, the net profit of Infosys declined 28.1 percent and revenues grew 1.6 percent.

Disclaimer: The author is Vice-president, Equity Research at Ajcon Global Services. The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Apr 20, 2018 12:39 pm
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