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TCS – Q4FY21 first cut

ICICI Direct Research on TCS Q4FY21 results:
Tata Consultancy Services’ (TCS) results were below our estimates. While revenues were in line with our estimates, EBITDA & PAT were below our estimates mainly due to lower than expected gross margins. In terms of revenue growth across geographies (in CC terms), North America grew 3.9% QoQ, UK & Continental revenues increased 3.4% QoQ & 8.5% QoQ. In terms of verticals, revenue growth was led by Manufacturing (up 3.9% QoQ), BFSI (up 7% QoQ), Life Sciences and healthcare (up 3.8% QQ), Communication & Media (up 1.8% QoQ), Technology & Services (up 2.8% QoQ) and Retail & CPG (up 4.0% QoQ). The attrition stood at 7.2% and the company added 19,388 associates taking the total to 488,649. One of the key highlight was that the company’s deal pipeline continues to be healthy at US$9.2 billion.

Q4FY21 Earnings Summary

  • Constant currency revenues grew 4.2% QoQ, in line with our estimate of 4.2%. US$ revenues grew 5.0% QoQ to $5,989.0 million, in line with our estimate of 5.0% QoQ growth and $5,987.1 million estimate
  • Rupee revenues grew 4.0% QoQ to | 43,705 crore (vs. our estimate of | 43,640 crore)
  • EBIT margins expanded 23 bps QoQ to 26.8% was mainly on account of operating leverage benefit. However, it was below our estimate of 28.5%
  • PAT of | 9,264 crore was below our estimate of | 9,599 crore
  • Tata Consultancy Services Netherlands BV, a wholly owned subsidiary of the Company, as a part of an overall arrangement, signed a definitive agreement on January 1, 2021, to obtain entire equity stake in Postbank Systems AG (PBS), a subsidiary of Deutsche Bank AG, at an agreed consideration
  • TCS has declared a final dividend of | 15 per share

The company aspires to register double digit revenue growth in FY22E. This coupled with healthy deal pipeline, increase in deals like captive carve outs and robust margins keep us positive on the stock from a longer term perspective. We would be revisiting our estimates and target price shortly.

TCS results
Tata Consultancy Services, reported its consolidated financial results according to Ind AS and IFRS, for the quarter ending March 31, 2021.

FY 2020-21: Other Annual Highlights Q4 FY 2021: Other Highlights
Net Income: $4.513 Bn; Net Margin: 20.3% Net Income: $1.267 Bn, +15.6% YoY
Employee Metrics: Net Addition: 40,185 employees Net Margin: 21.2%, +1 % YoY
Employee Headcount: 488,649 IT Services Attrition (LTM) at All-time Low: 7.2%


Cash conversion: Operating Cash Flow 100.0% of Net Income
Employee Headcount: 488,649 IT Services Attrition (LTM) at All-time Low: 7.2%


Cash conversion: Operating Cash Flow 100.0% of Net Income
Free Cash Flow: $5.13 Bn, +13% YoY Net Addition: 19,388 employees, highest ever in a qtr
Over $4.17 Bn of cash returned to shareholders through buybacks and dividends Final Dividend per share (proposed): `15

Rajesh Gopinathan, Chief Executive Officer and Managing Director, said: “Our investments over the last decade in building newer capabilities, and in research and innovation, position us well for the multi-year technology services opportunity ahead. While we continue to dominate in our traditional areas of strength, we are making good progress in gaining share in the growth and transformation opportunity. Our focus going into FY 22 will be to engage with clients in their growth agenda, propelled by innovation and leverage of collective knowledge.

N Ganapathy Subramaniam, Chief Operating Officer & Executive Director, said:I am pleased to note that in FY 21, leading organizations partnered with TCS in their growth and transformation journeys. Many of them benefited from our refreshingly different consultative approach to shaping, contracting, executing, and measuring the success of transformation programs, always holding ourselves accountable for the results.”

He added: “It is gratifying to bring down the curtains on FY21 with a solid performance on revenue, margins and deal momentum, all of which was possible due to the client-centric and `can do’ attitude of our associates rising to the occasion, keeping safe and healthy, professionally executing on SBWS™ and learning all the new products, toolkits and ways of working.”

V Ramakrishnan, Chief Financial Officer, said: “I am very pleased with our performance in Q4. This caps three quarters of consistently robust performance in a pandemic year, and gives us a strong exit from FY 21. Our Q4 margins are a validation of our strong belief that it is possible to win mega-deals, post industry-leading growth, continue to invest in our people and in newer capabilities, and still deliver industry-leading profitability. All the investments that we have been making over the years position us strongly to expand our footprint in the large growth and transformation opportunity.

Q4 Segment Highlights
Industries: All verticals showed good sequential growth, but a couple continue to lag prior year level – BFSI (+7% QoQ, +13.3% YoY), Retail and CPG (+4% QoQ, -0.9% YoY), Life Sciences and Healthcare (+3.8% QoQ, +19.3% YoY), Manufacturing (+3.9% QoQ, +1.3% YoY), Technology & Services (+2.8% QoQ, +3.9% YoY) and Communications & Media (+1.8% QoQ, -4% YoY). On a full year basis, Life Sciences and Healthcare (+17.1%), BFSI (+2.4%) and Technology & Services (+0.2%) showed growth while the rest continue to be below prior year levels.

Markets: Growth was led by major markets – Continental Europe (+8.5% QoQ, +11.7% YoY), North America (+3.9% QoQ, +5.9% YoY), and UK (+3.4% QoQ, +1% YoY). Other markets grew well: Middle East & Africa (+4.2% QoQ, +10.6% YoY), India (+2.8% QoQ, +11.2% YoY), Latin America (+2.5% QoQ, +1.5% YoY), and Asia Pacific (+1% QoQ, +1.5% YoY). On a full year basis, with the exception of Continental Europe which grew +5.5%, all other markets continue to be in negative territory compared to the prior year.

Services: Growth and transformation services, driven by clients continuing on their multi-horizon transformation journeys, saw strong demand. Advisory and Design services continue to gain traction across business stakeholders. There was robust growth across the board, led by Cloud Platform Services, Enterprise Application services, Cyber Security & Analytics.

  • Consulting & Services Integration:Strong rebound continues as companies move from crisis management to adapting to new beginnings. Q4 saw an uptick in M&A and divestiture activity with clients looking to restructure for better focus on their target markets and to raise cash for acquisitions. There was also strong demand for next generation enterprise transformation, enterprise agility, and cloud strategy & transformation services.
  • Digital Transformation Services: Growth was driven by increasing investing in technologies and business solutions to advance multi-horizon transformation imperatives. There was strong demand for data modernization and business analytics powered by DATOM, DAEzMo and Decision Fabric; intelligent connected solutions leveraging TCS Bringing Life to Things framework; Cyber Defense suite of services; remote work, automated and contact-less services, customer & employee experience, and supply chain modernization.
  • Cloud Platform Services: Accelerating investments in holistic digitalization enabled by cloud drove strong growth in public hyperscaler and private cloud services, led by migration and modernization, cloud native application development, and collaboration services.
  • Cognitive Business Operations: There was strong demand driven by customers’ need for resilient business operations and world-class experiences through integrated cognitive operations leveraging MFDM and CogniX. Growth drivers included multiple first-time outsourcing deals, acceleration of digital adoption and hyper-automation, datacenter services, Smart Workplace solutions, digital F&A, automation, service management and pharmacovigilance services.

Research and Innovation
As on March 31, 2021, the company has applied for 5,879 patents, including 245 applied during the quarter, and has been granted 1,850 patents.

Human Resources
In Q4, TCS add 19,388 employees to its rolls on a net basis, its highest ever net addition in a quarter. The total headcount stood at 488,649, a net addition of 40,185 during the year. The workforce continues to be young and very diverse, comprising 154 nationalities and with women making up 36.5% of the workforce.

TCS’ organic talent development initiatives continued to deliver industry-leading outcomes. Employees logged 43 million learning hours in FY 2021, resulting in over 379,000 employees getting trained on multiple new technologies, and over 457,000 trained on Agile methods. The company continues to be the employer of choice, with industry-leading talent retention. IT Services attrition rate (LTM) was at 7.2%.

With the second wave of the pandemic upon us, our top priority is once again to secure the health and personal wellbeing of our workforce across the world. We are looking at ways to expedite vaccinations for eligible TCSers wherever local regulations allow it, and in the meantime, urge everyone to stay safe, step out only if necessary, wear masks and practice physical distancing,” said Milind Lakkad, Chief HR OfficerOn the business side, our investments in organic talent development have been core to our ability to increasingly participate in our customers’ growth and transformation initiatives. Our organic talent development program anticipates the technology and business needs of our customers, and designs career paths that help our employees meet their aspirations, while building leaders and a future-ready workforce for TCS.” CT Bureau

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