Stock Fundamentals

Growth pangs in TCS. Should you buy it?

Vivek Ananth | Updated on December 07, 2019 Published on December 07, 2019

For investors in Tata Consultancy Services (TCS), the September quarter results were a bit of a dampener. Although in rupee terms TCS’ revenues grew 2.1 per cent quarter-on-quarter, dollar revenue growth was a modest 0.6 per cent.

With investors having built in double-digit dollar revenue growth for the current fiscal, the subdued growth in the September quarter, after a weak June quarter, has somewhat dampened expectations. The stock did correct post results, but still continues to trade at a premium vis-à-vis other large IT players.

At the current price, TCS trades at a 12-month trailing price- earnings multiple of 24.55 times. This is higher than its three-year average PE multiple of 22.91. Peers Infosys and HCL Technologies trade at a 12-month trailing PE multiple of 19.9 times and 15.1 times, respectively. While near-term risks to growth persist, the premium valuation of TCS is likely to continue.



Superior EBIT margins, high dividend yield, the company policy of returning 80-100 per cent of its free cash flows to investors and high rate of conversion of net profits into operating cash flows are key positives that augur well for the company, given the weak demand environment. Investors can hold on to their shares and accumulate in declines.

The deceleration in revenue growth in the first half of 2019-20 has been disappointing. TCS had reported 11.4 per cent growth in dollar revenues in FY19.

Long-term prospects intact

In the June quarter of FY20, revenue growth in dollar terms was 1.6 per cent q-o-q, moderating to 0.6 per cent in the September quarter. With dollar revenue growth of 7.2 per cent in the first half of FY20 (vs same period last year), expectations of a double-digit growth have taken a knock.

A seasonally weak second half can aggravate the growth slowdown. But TCS’ robust business, a large portfolio of services and investments ahead of deals coming on stream augur well for its long-term growth prospects.

TCS made a net addition of over 26,000 people in the first half of FY20. The company has consistently bagged several large deals in the recent quarters. In the quarter ended September, it bagged deals worth $6.4 billion. But the slow ramp-up of these large deals, impacting growth, is worrying.

The slower revenue growth has also led to lower margins. However, some of the slides in margins were caused by investments made by the company ahead of projects coming on stream.

Also, the firm is still seeing clients spending on their digital transformation. TCS’ digital revenues are growing at a fair clip and now constitute 33 per cent of its total revenue as of September 2019 compared with 19.7 per cent two years ago. With traditional services’ growth turning anaemic, digital services have helped cushion some of the blow on the overall revenue growth.






In rupee terms, TCS’ total revenues in the September quarter grew 2.1 per cent quarter-on-quarter to ₹38,977 crore; dollar revenue grew 0.6 per cent to $5.5 billion. EBIT margins came in at 24 per cent in the September quarter compared with 24.2 per cent in the June quarter.

The net profit in the September quarter fell 1.1 per cent to ₹8,042 crore as higher employee costs due to pay hikes and rising sub-contracting costs weighed on earnings. But high generation of cash from operations, at over 108 per cent of net profit, holds TCS in good stead to tide over near-term volatility.

Segment performance

The retail and consumer packaged goods vertical is witnessing a broad-based slowing of spends by clients. This has led to sequential slowing of revenue growth in recent quarters. Apart from that, the BFSI vertical is also seeing customers cut back on spends. In the US, this is being led by capital-market clients, while in Europe, it is the big banks that are reducing spends.

Manufacturing also saw slow growth during the September quarter. Regional markets such as India, Japan, West Asia and Asia Pacific saw growth shrinking into negative territory sequentially.

The management has been surprised by the slowdown in retail and hopes that the holiday season spending by consumers will boost growth and offset some of the weakness in retail and CPG client spends.

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Published on December 07, 2019
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