TCS’ March quarter results were on expected lines with revenue of ₹50,591 crore and EPS of 26.85, both inline with consensus (Bloomberg). Another key metric – operating margin at 25 per cent was also inline with expectations. The company closed FY22 with revenue of ₹1,92,000 crore, EPS of 103.63 and operating margin of 25.3 per cent.
Operational performance was broad based with the company seeing growth across all business verticals and geography. Cash conversion was strong with cash flow from operations at 111.3 per cent of net profit. Deal momentum remained good with order book at all-time high, and not yet showing any impact due to the recent geopolitical events.
Amongst the negatives were continuing levels of elevated churn reflecting shortage of talent and cost pressures that may sustain because of that. Last 12-month attrition was at 17.4 per cent and higher versus Q3 in which it was at 15.3 per cent.
Key takeaways
TCS does not give guidance. Management commentary was broadly positive based on deal wins and current momentum. However, without more clarity in the current environment where a lot of macro and geopolitical pressures are elevated, not much can be inferred from positive commentary. In the past, management had atleast given comments like constant currency is likely to be in double digits, while this time they didn’t want to give any indications.
While the company reported a good constant currency (cc) revenue growth of 15.8 per cent in FY22, key competitor which has reported results so far – US listed Accenture, reported CC (USD) revenue growth (quarter ending Feb 22 vs March 22 for TCS) of 24 per cent. Further, Accenture also increased its FY revenue outlook (excluding any potential impact of Russia-Ukraine crisis) and indicated that it is gaining market share in the industry. Overall, Accenture has been growing faster than TCS and is expected to continue on that trend through combination of organic and inorganic growth.
TCS now trades at one year forward PE of 30.8 times versus Accenture’s at 28.1 times. Given better growth of Accenture, it is unlikely that TCS’s valuation premium can sustain for long (atleast from the perspective of FPIs). Peer Infosys too has been showing better growth than TCS in recent times.
Further, with last 5 years EPS growth at 10 per cent, and no convincing indication that EPS growth is going to accelerate much versus historical levels, its current valuation is pricey and future returns are likely to be sub-par from current levels. Hence, investors must wait for corrections to buy stock. With global bond yields increasing at unprecedented levels making equities less attractive, and possible impacts to business due to Russia-Ukraine crisis which can impact client’s IT spending, probability of correction remains high
Published on
April 11, 2022
