TCS has reported its September quarter results that could be seen as little bit of a relief after a disappointing June quarter report. A key metric – operating margin came in a 24 per cent – a 25 basis points beat to consensus expectations (Bloomberg) of 23.75 per cent. In June quarter TCS had missed consensus expectations by 50 basis points.

Revenue for the quarter was inline, and Y-o-Y constant currency (CC) revenue growth was good at 15.5. Operating profit was 2 per cent above. The strong topline growth however has not translated to a strong bottom line growth with operating profit growing only by 10.5 per cent Y-o-Y. Further net profit grew a mere 8 per cent.

Attrition remains high

Also last twelve month attrition at the end of September quarter was at 21.5 per cent and was weaker than 19.5 per cent at the end of June. Attrition remains high and continues to impact profitability, although management expects improvement going forward.

Business so far does not appear to see any impact due to macro issues in key geographies – North America and Europe – which accounted for 54 per cent and 29 per cent of September quarter revenue respectively. However North America has witnessed better growth than Europe, which may be reflective of the more serious issues the continent is facing as compared to the US.

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Across business verticals also, company saw robust growth. According to management, so far the macro issues are not impacting their business/order flows, but noted that the environment on the ground in key geographies is challenging and there is a need to be vigilant. In their view the company remains well positioned to address client needs and add value irrespective of the economic environment clients face.

What results mean for investors

As mentioned above, while results could be viewed as a relief given a disappointing prior quarter and turbulence in global markets due to macro issues, at an absolute level TCS’ earnings do not justify its premium valuation. TCS trades at one year forward PE of 26 times, a multiple that appears quite expensive when considering its earnings growth is estimated to be at around 10 per cent in FY23.

Its PE multiple implies a earnings yield (1/PE) of just 3.8 per cent in an environment where risk free 2 US treasury bonds are giving a higher yield at 4.3 per cent. Its premium valuation may have had better relative justification when the same 2 year bond was yielding just 0.32 per cent same time last year. That is no more the case and risk free bonds and FDs in India too are offering higher yields now .

This apart TCS peer Accenture trades at one year forward PE of 22.5 times – a good 13 per cent discount to TCS despite its number one status in the industry, and reporting better cc revenue growth of 22.4 per cent in its recent quarter. When it comes to TCS, investors must be cautious to not over pay for a stock, just because it’s a high quality company.

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