TCS' FY15 revenue gets booster from Japan

Tata Consultancy Services (TCS), India’s largest information technology services provider, reiterated its FY15 growth outlook is much better than FY14, taking its share price to touch a 52-week high at Rs 2,667 apiece during intra-day trading on Tuesday. The share price of the firm corrected and closed at Rs 2,630 a share on the BSE.

Analyst expect TCS, which had reported growth of 16.2 per cent for FY14, to grow at 17-18 per cent, thanks to its joint venture (JV) with Mitsubishi in Japan. On a quarter-on-quarter basis, the Street expects TCS to report a seven to eight per cent growth in dollar revenue. “Even without the Japan JV, TCS was tracking a growth rate of five to six per cent,” said an analyst, who did not wish to be named.

“We understand that the management’s confidence is based on client interactions, order books / deal wins / ramp-up expectations, quality and size of pipeline, discretionary spend patterns and execution ability of TCS. The management has been indicating that there is agility in decision-making and business spending across the three major areas - discretionary, simplification and regulatory spends. These are being driven by digital initiatives (digital re-imaging), cost efficiencies / cost optimisation and risk / compliance requirements, respectively,” said Dipen Shah, head (private client group research), at Kotak Securities in his report.

Rajesh Gopinathan, chief financial officer at TCS, had met analysts on Monday as part of pre-results briefing. Analyst confirmed the company expected India business to do well this quarter, which will be a positive. India in the first quarter of FY15 had reported a growth of 5.2 per cent.

The management also highlighted that growth will be driven across verticals. “BFS (banking and financial services) is likely to accelerate during the quarter, but weakness is likely to persist in Insurance. Media, travel & hospitality, and life sciences are likely to be weaker than the previous quarter,” said Shashi Bhushan of Prabhudas Lilladher.

In the first quarter, BFSI (banking, financial services and insurance) growth was down 0.3 per cent, primarily due to weakness in insurance. The company is expecting insurance sales to remain soft. It also said sales in Europe, due to holidays in July-August, will be softer.

APAC including Japan will be a differentiating story for TCS in the second quarter, as the Japan JV will start contributing to the revenue. TCS had announced that, TCS Japan will merge with IT Frontier Corporation, a 100% IT subsidiary of Mitsubishi Corporation and Nippon TCS Solution Centre TCS will, then, acquire 51% of the JV with Mitsubishi holding the remaining 49%.

TCS had revenues of about $104 million accruing from Japan in FY2014 with high single digit margins. On the other hand, ITF had revenues of $500 million with margins of low single-digits.

Though the revenue from the JV is a positive this will be impacted by cross currency movement. The street and the management too confirmed that the cross currency movement would have a negative impact of 80 basis points.

"During Q2FY15, EBIT margin is expected to remain stable as cost from Japan consolidation will offset the absence of one off cost due to change in depreciation policy of last quarter (~80bp impact). We believe that with wage hike impact behind (in Q1FY15) as well as high organic revenue growth should help in operating margins going up by around 50bps q-o-q. TCS continues to maintain its target band for margins as 26-28% going forward and its investments will be focused on strengthening its presence in Japan and France, in addition to developing its digital practice. Other Income during the quarter is expected to be lower by Rs 300 crore as the company distributed special dividend during the quarter which caused an outlay of Rs 15,000 crore," said Ankita Somani, of MOSL.