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TCS: Time for re-rating?
Niraj Bhatt & Shobhana Subramanian in Mumbai
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July 17, 2007

The appreciating rupee has taken its toll on Tata Consultancy Services' [Get Quote] June quarter numbers, with the top line growing just 1per cent sequentially in rupee terms to Rs 5202.8 crore (Rs 52.02 billion).

However, in dollar terms, the growth has been a smart 8 per cent compared with Infosys [Get Quote] 7.5 per cent. Infosys, however, managed a better blended billing rate increase at just over one per cent compared with 0.6 per cent for TCS.

On the operating profit margin front too, both the companies have seen more or less similar falls -- 280 basis points for TCS to 25.5 per cent, and 300 basis points for Infosys to 28.7 per cent. The Street was expecting a greater fall in TCS margins.

For both companies, wage hikes and the rising rupee have impacted margins. And both have managed to contain the fall in the margins with better revenue productivity -- 213 basis points in the case of TCS.

Where TCS appears to have scored over Infosys in the June quarter is in the mining of its clients. It has done exceedingly well in every single category -- the number of $100million-, $50 million- and $20 million-clients have all gone up significantly during the quarter and TCS now has six $100 million- clients, double the number in the March quarter. Infosys has mined its clients the number of $80 million clients doubled -- but not as impressively as TCS .

The management also sounds far more confident about the pricing environment and claims it is able to get upwards of 5 per cent for new clients while being able to extract 2-5 per cent more from existing clients.

Also, the share of fixed price and fixed time contracts for TCS has gone up by about 250 basis points in the quarter its possible that TCS was more efficient and completed projects before schedule. 

At the current price of Rs1,128, the stock trades at a price-earnings (P/E) multiple 23.6 times estimated FY08 earnings and 18 times FY09 earnings. In comparison, Infosys, at Rs 1935, trades at just under 25 times FY08 earnings and 18 for FY09.

The P/E multiple gap between the two has been narrowing over the last six months and If TCS continues to perform like this for another couple of quarters, it could even trade at a higher multiple than Infosys.

UTI Bank [Get Quote]: Rising expense

Though UTI Banks net interest income grew by 39 per cent y-o-y in Q4 FY07, its operating profit did not keep pace due to rising costs. Operating profit went up 30 per cent as operating expenses increased 76 per cent, mainly on account of staff costs rising nearly 86 per cent.

There was pressure on the net interest margin, which declined 34 basis points sequentially to 2.72 per cent. The bank attributes this decline in NIM to the acquisition of short term priority sector assets, which earn lower yields, at the end of Q4 FY07, and as these assets go off the books, NIMs can be expected to improve.

The business momentum was strong in Q1 FY08, as advances grew 60 per cent y-o-y and deposits were up 45 per cent, which is well above the industry average of about 25 per cent loan growth.

Even low cost deposits (savings and current account) went up 226 basis points y-o-y to 37.75 per cent. Also, there are no concerns on asset quality in case of UTI Bank, as net NPAs are down 14 basis points y-o-y and 2 basis points q-o-q to 0.59 per cent.

A 47 per cent y-o-y increase in fee and other income helped the net profit rise 45 per cent in Q1 FY08, thus mitigating the impact of the lower NIM. Its loan syndication and cash management services are doing well.

The cost of funds has gone up by 51 basis points q-o-q, but yields will also rise owing to the increase in lending rates, and the low interest assets mature.

Going forward, salary costs are likely to remain high as the bank keeps expanding branches, but that should not be a cause for concern as growth in both core banking and fee income will continue.

The bank will be raising capital this year to fund loan growth and improve its capital adequacy ratio. At its current price, the bank trades at 4.4 times estimated FY08 book value and 3.5 times FY09 book, and should continue to be an outperformer.

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