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Tata Consultancy Services - TCS

Result highlights:

Tata Consultancy Services (TCS) Q3FY2009 results were below our as well as street expectations. The resuls came below our expectations largely on account of lower-than-expected revenues primarily due to sharp cross currency movement and a lower-than-expected volume growth.

The consolidated revenues in rupee terms grew by 4.7% quarter on quarter (qoq) to Rs7,277 crore driven by favourable exchange rate (contributing 3.4% to the top line growth). In constant currency terms, the revenues grew by 1.23% sequentially driven by a 2.4% volume growth. This was partially offset by higher proportion of offshore revenues (-1.6%) and pricing (-0.1%). In dollar terms, the revenues declined by 5.8% qoq to US$1,483 million below our expectations on account of sharp cross currency movement and a lower-than-expected volume growth.

The earnings before interest and tax (EBIT) margin improved by 53 basis points to 24.8% in Q3FY2009 on account of favourable exchange rate (136 basis points), higher proportion of offshore revenues (25 basis points) and reduction in selling, general and administrative expenses (166 basis points). However, this was partially offset by decline in the utilisation rate (269 basis points). Consequently, the company’s EBIT rose by 7% sequentially to Rs1,802 crore in Q3FY2009.

The net income increased by 7.2% qoq to Rs1,352 crore in Q3FY2009, below our expectation of Rs1,457 crore. During the quarter, the company reported foreign exchange (forex) losses of Rs251 crore compared to Rs261 crore in Q2FY2009.

In terms of demand environment, the management highlighted that the company is witnessing slowdown and cancellation in banking, financial services and insurance (BFSI), retail, manufacturing and hi-tech verticals.

During the quarter, the company made gross addition of 11,773 employees (net addition of 8,692 employees). In M9FY2009, the company has made gross addition of 30,437 employees and is on track with its target of 30,000-35,000 employees for FY2009.

The unrecognised forex losses sitting on the balance sheet have further expanded to Rs739 crore in Q3FY2009 from Rs659.3 crore reported in the previous quarter.

At the current market price, the stock is trading at attractive valuations of 9x FY2009 earnings estimate and 8x FY2010 earnings estimate.