Why TCS stock is going up?

TCS Q2FY21 Result Analysis

Introduction

Recently TCS crossed market capitalization of INR 1 lakh crore and became the world’s most valued IT company, surpassing Accenture. Company also declared its quarterly results and registered healthy profit growth. The stock price of TCS has increased ~12% in the past one week. Let us understanding the reason behind TCS stock price soaring high every day and analyse its quarterly results in this blog.

Why TCS stock is going up?

1. Free Float Market Capitalization

• Free Float market capitalization is basically the amount of shares available to be traded publicly.
• Share prices fluctuate according to demand and supply of shares and free float market capitalization plays a major role in this.
• For example, Infosys‘ promoter holding is 13.15% and free float market capitalization is INR 4.05 lakh crore, as against TCS free float market capitalization is nearly half that of Infosys i.e INR 2.75 lakh crore.
• TCS is planning to decrease this free float market capitalization by buying back more shares. Thus, as demand for TCS shares increases, supply will be limited ultimately driving up the share price.

2. Healthy Quarterly (Q2FY21) results

• In Q1FY21, management had given guidance for sequential revenue growth in Q3FY21, however company was able to achieve this growth in Q2FY21 itself.
• TCS reported sequential cc revenue growth of 4.8% QoQ .
• Similarly, management had given operating profit margin improvement guidance in Q4FY21, however it was achieved in Q2FY21 itself.
• In this quarter, operating margins expanded significantly on QoQ basis at 26.2%.

3. Buyback of shares and dividend declaration

• Company has announced buyback of 5.33 crore equity shares at INR 3000 per share, amounting to INR 16,000 crore.
• Buyback usually signals that company’s confidence in its own operations and hence it thinks the share price is undervalued which is a positive sign.
• TCS has declared second interim dividend of INR 12 per equity share of face value of INR 1 which shall be paid on 3^rd November’20 and record date is 15^th October’20.

Quarterly Results Analysis

Q2FY21 Revenue Highlights

• IT companies usually report their revenues in INR, USD and constant currency. Usually it is preferred to look at the constant currency revenue growth as it eliminates the foreign currency fluctuation effect.

• Here, as we can see company has achieved revenue growth of 4.8% QoQ while there is a revenue de-growth of 3.2% on YoY basis.
• As we can see although the revenues have declined on YoY basis in terms of USD and constant currency, there is an uptick in revenue growth in INR terms.

Q2FY21 Operating Profit Margin (OPM)

• As seen, company’s operating profit margins have expanded significantly in Q2FY21.
• Along with robust operating profit margins, since IT companies have low capital expenditure, it has strong free cash-flow of INR 9,900 crore.

Net Profit

• Company has reported Net profit of INR 7,475 crore which is including provision for a legal claim worth ~ INR 1000 crore for legal battle against Epic systems.
• However, these costs are one-time costs and do not occur every quarter. Excluding the legal claim provision,s company’s profit is INR 8,433 crore with a net profit margin of 21%.
• Having such healthy margins (operating profit as well as profit margin) despite being such a huge MNC is commendable and hence market is rewarding it with premium valuations.

Client Concentration

• Here company has gained 2 major client from $100 Mn+ category on YoY basis.
• However, it has lost some clients from $ 50 Mn +, $10 Mn+ and $20 Mn+ categories.
• This is mainly because there is huge competition in these categories among mid-sized and large IT companies. Usually larger clients are sticky and do not change IT service providers easily.

Human Resource

• Ultimately for an IT company, it is important to look at the human resource parameters as it comprises of one of the major assets of the company.
• Enabling work from home will help to increase the women employees in overall employee mix.
• Also, company is well diversified in terms of nationalities, which secures it from changes in immigration policies and rules.
• Also company has one of the lowest attrition of 8.9%. This proves that company is well placed from human resources perspective.

Valuation

• It is clear from the valuations that company is currently trading at euphoric valuations, which do not seem attractive.
• Usually when this company trades in the range of 30-35 x PE, there is PE re-rating and some correction in price is usually seen.
• Although company has good track record of performance as well as earnings visibility, it seems unlikely that company will be able to withstand such high valuations.