One of the leading global IT services, consulting and business solutions organisation, Tata Consultancy Services (TCS), posted a double-digit growth for its fourth quarter of financial year (FY) 2019, thereby beating a consensus estimate. The company’s net sales and net profit has clocked a compounded annual growth rate (CAGR) of nine per cent and 10 per cent over FY 2015-19. TCS delivered 2.4 per cent revenue growth quarter-on- quarter (QoQ) and 12.7 per cent growth Y-O-Y on constant currency (CC) basis, primarily driven by growth across its segments and geographies. Increase in the topline was led by growth of 11.6 per cent year on year (Y-O-Y) in BFSI, followed by 9.9 per cent growth in retail and CPG vertical and 10 per cent growth in communication and media vertical.
When it comes to growth across key geographies, North America saw a 9.9 per cent Y-O-Y growth, UK (21.3 per cent), India (11.3 per cent) and Asia pacific (11.5 per cent). TCS’s digital revenue showed a continuous momentum and grew by 46.4 per cent Y-O-Y. “TCS’ growth and scale leadership in digital (USD 6.7bn annualised) are key differentiators. Continuity in strong deal wins; broad-based growth across verticals (especially core) and geographies are driving double-digit growth. Margin or attrition differential vs. peer set reflects superior execution,” pointed out an analyst at HDFC Securities. On the flip side, the company’s earnings before interest taxes (EBIT) margin declined by 50 basis points (bps) to 25.1 per cent Q-O-Q due to higher selling, general & administrative expense (SG&A).
According to the management, the quarter saw a very strong deal closure, the total contract value (TCV) of contracts signed in Q4 was $US 6.2 billion, a indication of a very good trajectory in products and platforms deal win as per market experts. “We believe that valuation multiple is linked to USD revenue growth and margin performance and hence improvement in the same for TCS holds potential to drive further re-rating. If we compare TCS with peers such as Accenture and Cognizant, which command forward multiples of 20-21x, TCS, with its organic-dependent growth, too can command the same or more, which is also in line with its long period average,” said an analyst at Prabhudas Lilladher.
Despite obstacles such as higher sub-contracting cost, localisation and onsite hiring, TCS has still managed to retain its margins. “The management has stated that it intends to participate aggressively in all tendering process and hence the use of subcontractors, given supply-side constraints in the US. Over time, it is likely that the management will rationalise subcontractor costs and replace them with lower-cost resources,” said an analyst at Nalanda Securities. Brokerages such as HDFC Securities, Sharekhan and Prabhudas Lilladher remain bullish on the company’s stock.
