TCS Q1FY17 Results - Strong but Irrelevant!!!

TCS delivered very strong operating performance for Q1FY17 (first quarter of financial year FY17) but its no reason for investors to get elated.

Results Snapshot

• TCS delivered strong USD revenues which grew 3%qoq to $4362mn driven 
• Volume growth of 3.4%
• Realization improvement of 0.3%
• Cross currency negative impact of -0.7%
• In rupee terms, revenue grew 3% qoq to Rs.29305crs
• Average USD/INR realization worsened for the quarter from 67.63 to 67.18
• Operating profits grew 9% yoy to Rs.7837crs
• EBIDTA margins stood at 26.7% down 100bps from Q4FY16 and down 130bps compared to 28% during Q1FY16
• However due to change in accounting and seasonality of Q1 as both annual wage hike and increase VISA costs kick in, there is not much to read into it
• Net profit for the quarter grew 14.3% yoy to Rs.6497crs...well ahead of consensus forecast...Expect a GAP UP opening tomorrow...but use it to Sell/Exit the stock as BREXIT risk hasn't played out yet

Valuations Reasonable...but for a reason

• At CMP of Rs.2520 the stock trades at 18.5x FY17 earnings of Rs.18.5 per share and  16.5x FY18 earnings of Rs.153 per share
• TCS valuations are undemanding, however, these valuations could slide down in coming quarters as BREXIT starts hitting TCS revenue.

BREXIT Risk

TCS Management is uncertain about how Brexit will impact Company and has only mildly warned investors about risks thereof. However, neither management has explained nor analysts have raised pointed question about the same. Fact remains from 100+ GBP has corrected more than 10% which can knock off 500bps from 14% UK business 

The key questions remain unanswered are - 

1. Do existing contracts with clients include a re-negotiation clause related to event-led sharp movement in currencies?

2. Will client who themselves might be facing uncertain business environment/loss of confidence would be willing to provide hike to IT service providers like TCS?

3. What is the indirect impact of BREXIT meaning companies (clients) which are based out of UK & Europe but are negatively impacted from BREXIT 

4. In case, TCS is unable to pass it on depreciation in GBP and Euro to clients, are they any other levers to protect profitability.

A rough estimate suggests that BREXIT can shave off 0.5-1% revenue growth and 0.3%-0.6% operating margins for the coming quarter and this risk will only intensify over the coming 2-3 quarters. 

To sum up, going ahead more than 20% of TCS business (UK 14%, Europe 7%) will face strong revenue headwinds as well as margin pressures, however, Q1FY17 has not been impacted by the same and hence the strong performance during the quarter is quite irrelevant. Use any rallies to SELL the stock.  

TTK Prestige 2Q15 Results - Muted but dont lose your heart

TTK Prestige earnings 2QFY15 delcined 8% yoy to Rs.28crs mostly due to unabsorbed costs at the new Gujarat manufacturing facility. 

Gujarat manufacturing unit is very strategic to company as most of the competitors continue to heavily rely on Chinese imports. The Indian unit will not only help avoid foreign exchange volatility but also improves speed to the market and assures consistent quality of its products. The unreliability of Chinese vendors was evident during the quarter as the Company lost 7-8crs of sales due to poor quality imports from China.

Currently, Gujarat plant is operating only at 30-40% capacity. Some signs of demand pick-up were evident during the quarter domestic sales grew 14%. However, one needs to be cautious as festive demand could be temporary. Nonetheless, worst seems to be over. 

Exports declined 6% during the quarter. However with new designs of microwave cookers ready for Japanese markets and Gujarat plant exports falling in place, exports growth could come back strongly.

2QFY15 Financials:

  

 

Hammerson Plc. 2013 Annual Day -Commercial Property Market at Tipping point

Hammerson PLC. 2013 Annual Day Key Highlights 

• UK economy held up better than expected during Christmas 
• UK retailers are confident of improving demand in coming quarters
• The higher confidence comes from falling unemployment rate and improving GDP 
• Reported retail sales data doesnt provide the correct picture of demand 
• As per Hammerson calculation which they showcased for 2 retailers the real demand for these retailer increased dramatically when adjusted for online sales which does not get recorded otherwise
• Starting 2015 Hammerson will make GBP5mn annual investments to support higher growth in business. 
• Company remains committed to its GBP1bn capex till 2018
• Value retail has grown strongly during 2013 with sales up 13% to Euro1.9bn
• In summary the Performance Drivers are
• Value Retail
• Growth from existing portfolios
• New developments
• Extensions and refurbishments
• Acquisitions on track to deliver significant shareholder value
• Bullring - increase stake to 50% in 2013; lease renewal at 10% plus
• Junction Fund
• La Vallee Village
• 2014 Specific plans in London
• Brent Cross - will complete S106; submit leisure planning application; secure CPO resolution
• Croydon - will conclude 
• Goodsyard located at Shoreditch sitting at Euro14mn in books whereas market value is ~30mn
• Earnings are expected to grow at rate of 20%-25%

In summary, Hammerson management is quite bullish about UK commercial property and is calling for tipping point in ERVs. In many cases, rentals inching up 10% plus on renewals should also calm the fears of bubble in UK real estate. We believe that UK and Europe REITs offer the best risk-reward in the world today and should deliver very strong returns over the next 2 years.