TCS Q1 numbers show investors have a lot to cheer

ET Intelligence Group: The stock of TCS has been trading at a record level in the past few weeks on hopes that the country’s largest software exporter will enjoy the early-mover advantage in digital solutions and tight grip on cost efficiency. Its June 2018 quarter performance suggests that the company will be able to sustain the high valuation given the rising momentum in the erstwhile laggard vertical of banking, financial services, and insurance (BFSI), upbeat trend in digital solutions, and growing order pipeline.

The dollar-denominated revenue growth in the June quarter was 4.1 per cent sequentially at the constant currency (CC) rates that is after excluding the currency fluctuation during the quarter. Though the first quarter of a fiscal is seasonally strong for software vendors, the latest growth was the highest in any of the first quarters since June 2014 when revenue had grown by 5.5 per cent in CC terms.

This reflects the increasing momentum. According to the TCS management, the large contracts that were signed during the past four quarters have started contributing to the topline, which is now visible in the growth rate. It means the momentum should continue in the coming quarters as well.


Another positive factor is the turnaround shown by the BFSI segment. After a lull for the past several quarters, its revenue grew by 3.7 per cent sequentially for the June 2018 quarter. In addition, the US market reported a similar growth rate after a series of lower growth in the past. Given that BFSI contributes over one-third and the US over one-half to the total revenue, their turnaround should support growth in the coming quarters.

On the reported currency basis, dollar denominated revenue grew at a lower pace of 1.6 per cent despite nearly 5 per cent depreciation in the rupee against the dollar during the June quarter. This was due to a sharp depreciation in the euro and the pound against the dollar which reduced the benefit of the rupee’ depreciation by over 230 basis points. Revenue earned in other currencies is first converted in the dollars for the accounting purpose before finally converting it into the rupees and hence the given currency impact.

In the coming quarters, apart from the growing business momentum, control over profitability — operating margin fell by just over 40 basis points sequentially in the June quarter despite salary increase and visa costs against the expectation of 100 basis points drop — and lower software employee attrition at 10.9 per cent are other positive factors for TCS.

At Tuesday’s closing price of Rs 1,877, the stock traded at a trailing price-earnings multiple of 26.4.

Though this is high compared with the multiple of under 20 three years ago, the company is likely to sustain the valuation given the growth prospects.