Q1 Results: TCS is back, and firing on all cylinders
The only concern, for investors, is Tata Consultancy Services's (TCS's) high valuation of nearly 24 times one-year forward earnings
Tata Consultancy Services Ltd (TCS) celebrated its 50th anniversary in the April-June quarter (Q1). Whether by happy happenstance or perfect planning, it also turned out to be a quarter where multiple milestones were reached. The company reported quarterly revenues of over $5 billion for the first time, and its employee count— already at staggering levels—rose to over 400,000.
More importantly, the Q1 results addressed a constant crib of critics, including this column. Growth has returned to decent levels, after being stuck in the mid single-digits for almost two years. On a year-on-year basis, revenue grew 9.3% in constant currency, the highest in the last eight quarters. In all likelihood, TCS will report double-digit growth in the September quarter.
“We are focused on getting back well above double-digit growth...that is the biggest test of the appropriateness of our strategy,” Rajesh Gopinathan, chief executive and managing director of TCS, said at a press conference.
The company has sounded optimistic in the past, but never this confident. And for the first time in a long time, TCS has the numbers to back up its narrative.
The mainstay North American business, and the key banking and financial services vertical had dragged growth earlier, but are now growing at a decent pace. TCS said that a large part of its deal wins worth $4.9 billion last quarter were from these business segments. This, too, addresses concerns that large chunks of the company’s portfolio are underperforming.
To be sure, an increase in growth was expected by analysts, on the back of large deal wins TCS has been announcing in the past couple of quarters. Even so, growth appears to be slightly ahead of the Street’s estimates, which will please investors. The fact that the company has managed this without resorting to acquisitions is commendable, too.
What’s more, any worry that the large deals, including with Transamerica and Nielsen came at the cost of lower margins seems to have been unfounded, at least based on the company’s reported margins in the June quarter. Operating margin fell just 38 basis points sequentially, despite the impact of wage hikes and promotions given during the quarter. TCS said a large part of this was offset through scale benefits and other operational efficiencies. This is again better than analysts’ estimates of a decline of over 100 basis points in margins.
Which brings us to another milestone—operating profit grew 24.1% year-on-year, the highest in the past 17 quarters. Conversion of profits to free cash flow was decent too, at over 100%.
The big question, of course, is if all of this is sustainable. Going by the continued success the company has had with large deal wins, revenue growth can be expected to be in the double-digits for the year. And with margins being steady in a quarter where wage hikes were given, the outlook on margins looks bright as well.
The only concern, for investors, is TCS’s high valuation of nearly 24 times one-year forward earnings. While the depreciation in the rupee may help earnings grow by over 20% this year, it’s another matter if earnings will grow at a similar pace without the currency boost.
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