It was always going to be difficult matching up to Infosys Technologies Ltd’s stellar September quarter performance.
The country’s largest software services firm, Tata Consultancy Services Ltd (TCS), came close in some areas, but fell short in key areas such as quarter-on-quarter profit growth and margin improvement. The firm reported an impressive 8.19% increase in volumes, higher than the growth clocked by Infosys at 7.3%. But core profit grew by just 12% over the June quarter—less than half the rate at which Infosys grew profit (26.8% after adjusting for exceptionals).
Profit margin rose by 77 basis points for TCS, much lower than the 412 basis points quarter-over-quarter jump in Infosys margins. What’s more, all of TCS’s margin gains can be accounted for by hedging gains. The company follows an accounting policy called cashflow-based hedging, which allows it to book hedging gains on some contracts against its revenues. Companies such as Infosys book all their hedging gains in other income. Devoid of hedging gains, TCS has no margin improvement to speak of on a quarter-on-quarter basis as higher employee costs and the negative impact of the rupee appreciation offset scale benefits, savings from shifting work offshore and gains from higher price realizations.
TCS continued to impress on the other income front, again propped up by gains on foreign exchange (forex) hedges. Infosys had no hedging gains to speak of last quarter, but TCS reported other income of Rs110 crore, primarily made up of hedging gains. TCS has demonstrated more aggression in hedging its forex exposure, and has hence gained more on the hedging front. Its outstanding hedges worth $2.6 billion (Rs10,218 crore) are the highest in the industry, and it was also among the first companies to go for long-dated options as a part of its strategy to hedge risk as far out as possible. Infosys prefers to hedge exposure for just the coming two quarters.
That could be one of the reasons TCS’ profit growth is superior on a year-on-year basis, where the impact of the appreciating rupee is maximum. Last quarter, it grew core profit (adjusted for exceptionals) by 23.7% and net profit by 32%, higher than Infosys’ core earnings growth of 20.8% and net profit growth of 24%. Note that even TCS’ core earnings include hedging gains, unlike Infosys. Some analysts say TCS’ higher year-on-year growth could also be because its last year’s first-half results represented a low base, but there’s no doubt that aggressive hedging has also had a large role to play. The TCS management says that gains from hedging have to be seen as an integral part of operations and not viewed as traditional other income. Looking at the way TCS shares have moved when compared with Infosys (see chart), it does seem like the market is buying that argument.
What a difference raising over a billion dollars worth of capital makes. The money has allowed Axis Bank to retire high cost deposits, lower its cost of funds and to lend more. The consequence: a hefty rise in net profits to Rs227.82 crore from Rs141.98 crore in the year-ago period. Of course, the excellent performance was not entirely on account of the money raised. Fee income, for instance, has risen 69% year-on-year.
Operating profit has gone up 85% year-on-year, although much higher provisions and higher taxes led to a slightly more muted performance at the net profits level. The share of low-cost deposits has increased while much of the lending has been to large and mid-corporate advances, while retail assets now constitute 24% of total advances, compared with 29% at the end of September last year. Higher provisions and the growth in advances have led to net non-performing assets (NPAs) coming down to 0.55% of net customer assets, from 0.59% at the end of quarter ended June. The metric that has seen a big decline, due to the equity dilution, is return on equity (ROE), which is down to 13.64%, compared with 19.02% in the year-ago period. But the markets have paid scant heed to that, with the bank scrip up more than 25% in the past month.
That’s because the bank is now transforming itself from a plain-vanilla bank into a financial supermarket, on the lines of its peers. The management has indicated that, along with the change in the bank’s name, it will push into new areas such as credit cards and wealth management. The bank has increased its international presence. The setting up of an asset management company is another step towards that objective.
The flood of foreign institutional investor (FII) money pouring into the markets has pushed the Sensex up 21.6% between the close of business on 18 September, just before the US Federal Reserve cut its policy rate. Fast-moving consumer goods (FMCG), healthcare and information technology (IT) were left out of the rally. The Bombay Stock Exchange (BSE) FMCG index is up a mere 2.8% since 18 September, the health care index 4.9% and the IT index 7.5%. Mid-caps haven’t done half as well as the Sensex, with the BSE Mid-Cap index up 10.5% and the BSE Small-Cap index 6%.
That’s one reason why many retail investors feel left out of the rally, the other one being the speed of the rally, which has caught them by surprise. However, with the valuations of frontline stocks shooting through the roof, the hope is that mid-caps will be the next to rally.
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