Stock Review: TCS

JUST like its peers, TCS, too, has reported better-than expected growth in its revenue and business volumes during the September 2010 quarter. The largest IT exporter has also emerged as the most efficient player in the top tier in terms of incremental profitability over the trailing 12 months. TCS reported a 11.2% volumes growth, the fastest in at least 10 quarters, fuelled by a double-digit growth across its major verticals. The management has given bullish signals for the coming few quarters following an up-tick in the discretionary spends in the US, its major market. As put by the CEO and MD N Chandrasekaran, the demand environment is back to the "pre-crisis" period. Other top-tier IT companies that have declared results so far, including Infosys and HCL Technologies, have also reported strong revenue growth. But what sets TCS apart is its ability to maintain a much higher profit margin on the incremental revenue in the last 12 months. During the four quarters to September 2010, TCS earned 3,800 crore in additional revenue over the revenue in the four quarters ended September 2009. Similarly, its incremental operating profit was 1,804 crore, an operating margin of a whopping 47.5%.

   Its peers have also reported incremental revenues, but incremental operating profit is negligible. For Infy, the second biggest in the lot, incremental revenue was 2,350 crore but it showed a decline of 71 crore in incremental operating profit

   The data highlights the effectiveness with which the top players have come out of the recessionary phase. And TCS seems to have done a remarkable job there. The company has not only managed to win new orders but also earned healthy operating profit on them. In contrast, its peers are yet to see better incremental profitability. This also indicates that TCS is in a better position to take advantage of the strong traction in demand going ahead. Each of its key domains, including banking and finance, manufacturing, retail, and telecom, have seen double-digit growths in the second quarter. The company has also increased its hiring target yet again to 50,000 by FY 11.

   One concern, however, is the higher number of days for which credit sales are outstanding. TCS took 78 days on an average to collect outstanding receivables, much more than the 60-62 days taken by its peers. In the near term, TCs looks poised to benefit from the demand recovery in the global IT spends. This may prompt the Street to accord better valuation to its stock compared with its closest peer Infosys's valuations.