TCS’ Q4FY21 revenue of ₹43, 705 crore, operating margin of 26.8 per cent and EPS of ₹24.97 were generally in line with expectations. This is a tad disappointing given the run up in expectations following strong results from industry leader Accenture (ACN) last month. Revenue grew 4.2 quarter on quarter (q-o-q) on a constant currency basis (CC). This is against with ACN’s 5 per cent (February ending). Since the results were announced after market hours on Monday, the stock is down about 3 per cent today in an otherwise flat to mildly positive market.

Operating metrics remain robust

Continuing with trend in December 2020 quarter, the company saw broad based q-o-q growth across verticals and geographies in its March quarter as well. All verticals were up year on year (y-o-y) except for retail and communications. Largest segment BFSI which accounts for around 30 per cent of revenue outshined with 13 per cent y-o-y CC growth. Cash conversion remains good with operating cash flow 100 per cent of net income.

Also read: Why now is the time to book profit in TCS

While management does not give guidance, the commentary was positive with strong order book trends in recent quarters lending confidence. The company also added close to 20,000 employees during the quarter, almost equivalent to the headcount added in the first 3 quarters of the year. Overall headcount increased by 9 per cent during the year. This further provides an indication of management’s optimism into the future.

Outlook on stock

We had recommended a book profit call on TCS in the Portfolio edition dated January 24 purely on valuation grounds, noting that while TCS was executing at industry leading levels in most metrics, this was factored into its price. We do not see anything in the results to change that view. TCS closed FY21 with revenue of ₹1,64,177 crore – up 4.5 per cent year on year (y-o-y) and down by approximately 1 per cent in constant currency (CC) terms. A good performance given the pandemic disruption, but not enough to justify an around 50 per cent increase in its share price from its pre-pandemic levels. The last time TCS gave similar returns in one year - around 40 per cent returns – is between April 2018 to April 2019. At that time, its revenue grew over 15 per in FY19. Following this, it returned only around 5 per cent over the next 10 months till Feb 19 (just before pandemic struck).

It now trades at around 31 times its FY22 EPS (Bloomberg consensus). This is well above its one year forward PE of around 22-23 times in the two years till the pandemic. While its EPS is expected to grow by close to 20 per cent in FY22, this comes with benefit of base effect just 3 per cent growth in FY21 EPS. Based on current trends, its long-term revenue growth is likely to be in high single digits to low double digits. This is not the kind of growth over the long term that can justify 30 times PE (earnings yield of 3.3 per cent) when risk free 10-year government bond yield about 6 per cent in India. While recent rupee depreciation may provide a tailwind to business performance, it may be countered by the headwinds posed to the dollar carry trade (borrowing in dollars and investing in assets in stronger currency) from the rupee depreciation and rise in US treasury yields. This could take some sheen of the stock for FPI investors who so far found may have found TCS earnings yield attractive vs low interest regime in developed world. Hence investors can look at entering the stock post a correction.

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