TCS Q2 results: Key takeaways

Publish Date: October 16, 2018

Tata Consultancy Services (TCS) delivered a healthy revenue growth in the second quarter ended September 30.

The management also expects revenues to increase in double-digit for the rest of the year as it has already bagged a few mega deals this year. In addition, the IT giant’s revenues will be further bolstered by its ever-increasing digital arm of the company.

The currency depreciation — rupee has shed almost 14% of its value against the US dollar — is also likely to improve the company’s margins. Decline in currency value is good news for export-oriented businesses, like TCS, due to their hedging policies.

Related read: What is hedging

But its not all hunky dory for the IT firm. The retail growth may be strong but there are problems looming in the distance. The company’s technology investment largely comes from traditional retail firms. However, a hike in lending rates and a rash of economic uncertainties may deter retail companies from increasing their digital investment.

Furthermore, the company’s stock valuation implies that the company has left little to the imagination. It seems to have accommodated the company’s double-digit revenue growth going forward.

Related read: How to identify value stocks

Here’s a list of important takeaways from the company second quarter results:

Mega deals

The company is expected to grow by 10.7% in FY2019, mainly because TCS has signed five large deals with a total contract value of $8.8 billion. We expect these deals to provide $550 million — contribute 3% to the company’s constant currency revenue growth — impetus to the second half of the financial year.

— Has got a multi-year deal with Marks and Spencers
— Outsourcing contract with AC Nielsen ($2.3 billion)
— Its deal with Transamerica is expected to be over $2 billion
— Has bagged a 15-year deal with Scottish Widows
— Ten-year M&G Prudential valued at $690 million

Rupee depreciation

Shedding of rupee’s value has helped the IT firm in improving its margins. The company’s EBIT margins — an indicator of the company’s earning ability — will increase to 26.5% in 2018-19, up from 24.8% in 2017-18.

The EBIT margins also increased by 150 basis points. Of which, it got a 120 basis point boost due to rupee’s depreciation against the greenback.

Revenue growth

The Tata Group firm expected a stronger-than-expected currency growth of 20.2% (YoY). In constant currency terms, revenues rose by 11.5% from last year’s corresponding period.

The constant currency (c/c) terms is mainly used by firms that have substantial foreign operations. This calculation helps eliminate any foreign currency fluctuations while computing a company’s revenue numbers.

US and UK businesses

TCS has seen a rise in its revenue following corporate tax cuts in the US. We also feel that its business in North America is on the ascendancy.

The UK business, meanwhile, was particularly impressive — growing at 22.8% (Year-over-Year). Continental Europe and Asia Pacific have also reported 17.4% and 12.5% growth respectively.

Business verticals

BFSI (banking, financial services and insurance): 6.1% (YoY)
Retail: 15.6%
Communication and media: 8%
Manufacturing: 6.9%
Energy & utilities: 22.2%

*All in constant currency terms

Digital revenue

TCS’ digital arm posted 59.6% (YoY) revenue growth in constant currency terms, reiterating many analysts claim that it is the market leader in this segment.

Hiring

The company has added 10,227 employees on a net basis this quarter. Its total headcount now stands at 411,102. Participation of women in TCS workforce improved to 35.7%.

Stock valuation

The stocks are valued at a premium. As mentioned earlier, it has taken into account the company’s double-digit growth going forward. The question now is whether TCS can maintain this run?

Its future performance hinges on two things: First, if it is able to bag large deals like it has done this time around. Second, if it can retain currency benefits.

From a distance, it looks unlikely that the company can keep up the momentum of bagging mega deals. Also, past experience suggests that Tata Group company struggles to take advantage of currency depreciation.

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Disclaimer: REDUCE rating suggests we expect the stock to deliver -5 to +5% returns over the next 12 months.

BUY rating suggests we expect the stock to grow around 15% in the next 12 months.

ADD rating suggests we expect the stock to deliver more than 5% returns in the next 12 months.

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