TCS’ EBIT margin tops 26% in Q2 : What’s in it for investors?

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The IT company’s EBIT margin jumped over 26 per cent for the first time in seven quarters.
NEW DELHI: IT bellwether Tata Consultancy Services' September quarterly results largely came in line with expectations.

Net profit rose 7.64 per cent quarter-on-quarter (QoQ) and 22.57 per cent year-on-year (YoY) to Rs 7,901 crore. Consolidated revenue jumped 7.57 per cent QoQ and 20.67 per cent YoY to Rs 36,854 crore for the quarter under review.
Analysts in an ET NOW poll had predicted a net profit and revenue of Rs 7,929.30 crore and Rs 36,503.70 crore, respectively. Earlier in the day, shares of TCS closed 3.10 per cent down at Rs 1,979.75.

Below are 10 key takeaways of the TCS' September quarter results:

What’s in it for shareholders?
The board of directors has declared a second interim dividend of Rs 4 per share on a face value of Re 1 each and the same shall be paid to shareholders whose names will appear in the records on October 24, which is the record date fixed for the purpose. The same will be paid to shareholders by October 30.

Expert take
Apurva Prasad, HDFC Securities | I am pretty impressed with the performance, especially on the digital side. While the numbers are nearly in line with estimates, the digital performance clearly stands out. The fact that they were able to execute at such low attrition levels despite the differing trends within the industry, I think that is commendable. So I think we will maintain our positive stance. In terms of the industry pecking order within the tier-1 IT, TCS would continue to be our preferred pick and in terms of growth also they should be leading up there.

Pankaj Sharma, Independent Market Expert | The headline numbers on revenue and margins look decent, and this is something, which you cannot expect every quarter, that they will have better than expectation numbers, which TCS has been doing for quite some time quarter after quarter. In general the expectations were there and those expectations have been met by TCS. So this is largely okay and fairly satisfactory kind of performance.

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Earnings

Consolidated EBIT
The company’s EBIT margin jumped over 26 per cent for the first time in seven quarters. It was around 25 per cent, 25.4 per cent, 25.20 per cent and 25.10 per cent in Q1 FY19, Q4 FY18, Q3 FY18 and Q2 FY18, respectively. Analysts in an ET NOW poll had projected a consolidated EBIT margin at 26.76 per cent for the quarter under review.

Earnings per share (EPS)
EPS of Tata Consultancy Services jumped 22.67 per cent on-year to Rs 20.66. The figure stood at Rs 16.84 in the corresponding quarter last year.


Net cash from operations
Net cash from operations at Rs 7,363 crore stood at 93.20 per cent of net income in Q2 FY19.

Management-speak
On the Q2 performance, Rajesh Gopinathan, CEO and MD, said: “We are very pleased with our all-round strong performance in Q2. Revenue growth was driven by expanding demand for digital transformation across verticals, and continued acceleration in BFSI and retail. Our industry leading digital growth, and best-in-class client metrics bear testimony to our standing as the preferred partner in our customers' growth and transformation initiatives."

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V Ramakrishnan, Chief Financial Officer, said: “It is encouraging to be back in our preferred range of profitablflty at the operating level. Even as we expand our investments to build on our lead in the digital space, our disciplined operations, the improving growth trajectory and a supportive currency make our margins resilient."

Segment updates
Revenue growth accelerated in BFSI (over 6.1 per cent against 4.1 per cent in Q1) and retail and CPG (plus 15.6 per cent vs 12.8 per cent in Q1) for the quarter under review. Other verticals that are expected to show strong growth were energy and utilities (22.2 per cent), and life sciences and healthcare (over 14.7 per cent).

Geographical updates
Growth was led by the UK (22.8 per cent), Europe (17.4 per cent), and Asia Pacific (12.5 per cent). Revenue growth in North America accelerated further to 8.1 per cent against 7 per cent in Q1. In India, the figure was 7.4 per cent.

Addition to head count
TCS added 10,227 employees on a net basis in July-September, the highest net addition in 12 quarters. Total employee strength at the end of Q2 stood at 4,11,102 on a consolidated basis. The percentage of women in the workforce rose further to 35.7 per cent while the total number of nationalities represented grew to 147. IT services attrition rate remained steady at 10.9 per cent LTM.

Clients addition
The company added four new clients in $100 million and above club. It also added seven, 10 and 11 new clients in over $20 million, $10 million and $1 million bands, respectively.
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