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TCS joins party, beats Street

Net up 23%, though volume growth low at 1.25%

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(TCS) joined rival in topping market forecasts by posting a 23 per cent rise in its third quarter profit.

India’s number-one software services company also said, unlike Infosys which had maintained a cautiously optimistic outlook, that business environment looked better for the next two years.

Fuelling expectations the sector might be turning the corner, Infosys had raised full-year revenue forecast after addition of clients and an acceleration in IT spend by existing ones helped the Bangalore-based firm post a stronger -than-expected Q3 profit.

For the quarter ended December 31, 2012, TCS reported a of Rs 3,552 crore. Sequentially, it was up 1.1 per cent.

POSITIVES:
  • Management optimistic about future growth
  • Operating margin up 51 bps
  • 31 clients added; $100-mn clients up from 14 to 16 
  • Growth across sector and regions; US (2.5%), UK (5.2%)
  • Attrition down to 11.2%; IT services down to 9.8%
NEGATIVES:
  • Volume growth of 1.25%
  • Degrowth of 2.4% in Continental Europe 
  • 4.6% degrowth in telecom

The company reported revenues of Rs 16,070 crore, growth of 21.7 per cent on a year-on-year basis, and 2.9 per cent quarter-on-quarter. TCS maintained it was sure of beating the 14 per cent upper end of the growth projection for FY13.

The firm’s shares closed up 2.2 per cent, at Rs 1,334.50, on NSE, before it announced its results after markets hours.

A growth of 3.5 per cent in the banking, finance and insurance vertical and 5.8 per cent growth in manufacturing drove the company’s revenues. In terms of regions, North America (2.5 per cent), the UK (5.2 per cent), Latin America (10.9 per cent) and India (4.8 per cent) helped it track positive growth.

“We had a positive and well-rounded quarter. We have managed to do well in the US and UK, and our growth from emerging markets have been balanced. We have also seen a healthy intake of deals from across regions. I think 2013 and 2014 would be better than 2012. Clients have much more clarity of what they want to do. It is not about budgets but where they want to spend and the area of work,” said N Chandrasekaran, CEO and managing director, TCS.

However, the volume growth of 1.25 per cent for the quarter, much lower than the five per cent reported last quarter, disappointed analysts. “TCS’ numbers are lower than Infosys’ in volume growth. However, margins on constant currency are better. The management’s commentary after numbers is encouraging. The indication of better visibility in FY14 will support the stock price,” said Rikesh Parikh, vice-president (markets strategy and equities), Motilal Oswal Securities.

TCS attributed the low volume to extended furloughs in several verticals other than the traditional ones like manufacturing and high-tech sectors. Compared to this, Infosys had seen slightly better volume growth in Q3 (1.5 per cent), though it had also complained about ‘unanticipated furloughs’ in several sectors towards the end of the year.

“I would still have a rating of ‘hold’ on TCS because the 1.25 per cent volume growth is one-off, unlike Infosys, which has delivered poor volume growth for some quarters. I also think TCS deserves the pricing premium it has. Besides, the management is much more confident on the future, though I am a tad disappointed it did not give any quantitative peek into the client budgets,” said Pralay Das, research analyst, Elara Capital.

LEADING THE CHART
A comparison of key Q3 financial numbers of TCS and Infosys
  Revenue Pat Ebit
Company (Rs cr) QoQ (in %) YoY (in %) Q3FY13 (Rs cr) QoQ (in %) YoY (in %) Q3FY13 QoQ
TCS 16,070 2.9 21.7 3,552 1.1 23 27.3 50bps
Infosys 10,424 5.7 12.1 2,369 0.0 -0.1 25.7 -66 bps

The company also sprung a surprise by improving the operating margin to 27.3 per cent, a jump of 51 basis points over the previous quarter, through better productivity management. Infosys, however, had reported a 68-basis-point decline in operating margin, at 25.69 per cent, in Q3 of FY13. CFO, S Mahalingam attributed this to superior execution in a seasonally weak quarter.

TCS added a total of 31 clients for the quarter, with an addition of several large clients. TCS $100 million increased to 16 from 14 on a sequential basis. The large deals came in from banking and finance, telecom, transport and logistic, retail and healthcare.

The other two segments that acted as a drag on the company's numbers was Continental Europe which degrew 2.4 per cent and the telecom sector that reported a drop of 4.6 per cent in growth.

During the quarter, TCS added 9,561 employees (on net basis after taking into account the attrition) which took its overall headcount to 263,637. The attrition level in the Q3 came down to 11.2 per cent overall and 9.8 per cent in the IT services business, one of the lowest in the industry.

The company said it is well in line with its target of hiring 50,000 people for FY13. During the first three quarter of the fiscal, it has already hired 49,000 people.

“We have hired almost 50,000 professionals in the first three quarters of this financial year to support business growth and we continue to forecast a healthy growth in the workforce numbers going forward,” said Ajoy Mukherjee, Executive VP and Head, Global Human Resources.

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