TCS Q3FY20 Result Update Inline revenue growth & EBIT margin numbers

17 Jan
IT

TCS Q3FY20 Result Update Inline revenue growth & EBIT margin numbers

Inline revenue growth & EBIT margin numbers

Hits:

i.                     CC revenue growth on a sequential basis came in at 1.5% which was in line with the street expectation.

ii.                   EBIT margin came in at 25% which was in line with the expectation, improvement in the margin was led by higher utilization & INR depreciation.

iii.                  An interesting trend is the reduction in the sub-contracting expense since the last 2 quarters which has been a factor of concern for the margins.

iv.                 Growth was primarily led by the smaller verticals of manufacturing & life sciences which grew at 8.6% & 16.2%.

v.                   The order book in the vertical of BFSI remains healthy and the growth in the vertical shall be led by the relatively new banks and the insurance sector.

vi.                 The firm has declared an interim dividend of INR 5.

Misses:

i.                     Verticals of BFSI & retail have led to the weak revenue growth and this shall lead to the growth in the year to be lesser than last year growth of 11.4%.

ii.                   BFSI continues to remain soft and grew 5% YoY led by weakness in North American & UK banks, which the management expects to improve going ahead in line with Infosys’s management’s expectation

iii.                  Attrition for the quarter inched up to 12.2% from 11.6% in the last quarter, in a quarter where Wipro & Infosys saw a decline in attrition.

iv.                 Although the number of employees decreased in this quarter but this was due to the front loading of the 30,000 employees in the first half of the year.

v.                   PAT for the quarter came in at INR 8143 cr which was slightly below the street expectation albeit led by a lower other income.

vi.                 CC revenue growth for the quarter came in at 6.8% on a YoY basis, which is the slowest in the last 8 quarters.

Valuation:

At CMP of INR 2218, TCS is trading at 25.3 times FY’20 & 23.2 times FY’21 EPS.

View:

The result was in line with the expectation with revenue & EBIT margins coming in line with the expectation, but the management doesn’t expect to repeat their FY’19 performance in terms of revenue growth. *The stock is trading at the upper end of the forward P/E band, with a weak revenue growth trajectory albeit with a stable margin.* The stocks might see some correction in the near term.

 INR Cr Q3FY20 Q2FY20 QoQ Q3FY19 YoY
Revenues (mn$) 5586 5517 1.3% 5250 6.4%
Revenues 39854 38977 2.3% 37338 6.7%
EBIT 9964 9354 6.5% 9559 4.2%
– EBIT Margins 25.0% 24.0% 25.6%
PAT 8143 8078 0.8% 8121 0.3%
– PAT Margins 20.4% 20.7%   21.7%  

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