An analysis of TCS’ FY16 annual report shows constant currency
revenue growth of 11.9%, while INR revenues grew at 14.8% to
INR1086b. While revenue growth has been at its lowest level
since FY10, EBITDA margin fell 40bp YoY to a five-year low of
28.2% (which is still the highest in the industry). Higher income
from SEZ helped keep the effective tax rate low at 23%, which,
however, is likely to rise post the withdrawal of tax incentives.
Cash flow from operations declined marginally to INR191.2b
(FY15: INR193.7b) on account of increased working capital. Cash,
investments & ICD at INR335b (51% of net worth), which yield
6.8% returns, have been a drag on RoCE. Accounting for the
merger of CMC using the pooling of interest method boosts RoE
by 80bp. Contingent liability surged 3x due to a claim by EPIC
Systems and a rise in income tax liability.
Waning growth:
Revenue for FY16 grew 14.8% (lowest level
since FY10) to INR1,086b, while EBITDA increased to INR306b
(FY15: INR271b). However, EBITDA margin declined by 40bp
to lowest level since FY09 at 28.2% (FY15: 28.6%) due to
higher personnel cost.
Effective tax rate likely to increase on phasing out of SEZ
incentives:
TCS enjoys substantially lower effective tax rate of
23% compared to Infosys’ 28%. This is primary due to higher
proportion of income from SEZ which enjoys tax benefits.
However, the phasing out of tax incentives, as announced in
the Union Budget 2015 will adversely impact the company.
Earnings to cash conversion declines to 87% v/s 95% in FY15:
This is on account of an increase in working capital
requirements, primarily receivables which have increased to
INR240.7b (FY15: INR204.4b).
Cash, investment and ICDs at INR335b keep RoCE muted:
Over the past five years, the company has allocated 28% of its
funds toward cash, investments and ICDs (yield: 6.8%). This
has constrained RoCE to 42% which is still best among the
industry, though well below impressive RoIC of 71%.
CMC merger boosts RoE by 80bp:
CMC merger using the
pooling of interest method, recognizing asset/liabilities at
book value with no recognition of goodwill. As a result, RoE
for FY16 was higher by 80bp. Ind-AS mandates accounting for
acquisitions using fair valuation of assets/ liabilities, leading to
an increase in amortization cost.
Contingent liability rises 3x to 23% of net worth:
This is
primarily on account of IPR violation case filed by Epic
Systems Corporation for ~INR68b, while income tax demands
increased to INR80b (FY15: INR39b).
TCS FY16
The
ART
of annual report analysis
Effective tax rate could rise on
withdrawal of tax incentives to SEZ.
High investment in non-core assets keep
RoCE muted at 42%, well below RoIC of
71%.
Contingent liability rises 3x to 23% of Net-worth.
A
NNUAL
R
EPORT
T
HREADBARE
29 June 2016
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
M.Cap. (INR b)/(USD b)
1,6,12 Rel. Perf. (%)
Y/E Mar
Sales
EBITDA
PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
Payout (%)
P/E (x)
P/BV (x)
E: MOSL Estimates
As on
Promoter
DII
FII
Others
TCS IN
2,462
1,970.4
2,769/2,119
4,851.1/71.4
-4/0/0
2017E
1,248.5
339.4
265.4
135.0
9.6
421.1
35.5
18.2
5.8
2018E
1,437.3
389.2
305.5
155.4
15.1
508.8
35.9
15.8
4.8
Financial
summary (INR b)
2016
1,086.5
306.8
242.1
123.2
11.2
371.4
35.2
20.0
6.6
Shareholding pattern (%)
Mar-16
73.4
5.2
16.8
4.6
Note: FII Includes depository receipts
Dec-15
73.4
5.2
16.8
4.6
Mar-15
73.9
4.7
17.0
4.5
Auditor’s name
Deloitte Haskins & Sells LLP, Chartered Accountants
ART will present a threadbare portrait of annual reports - statistical, strategic and structured. We believe ART's wide canvas - from accounting and auditing issues to
operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.
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