Margin at 26-28% range will be maintained: TCS

Firm says it held on to its margin estimate despite volatile cross currency movement and consolidation of its Japan JV

Even though its recently-announced second-quarter numbers disappointed the Street, Tata Consultancy Services (TCS), India’s largest information-technology services company, managed to hold on to its margin estimate. The firm managed to do it despite a volatile cross-currency movement and the consolidation of its joint venture in Japan.

Rajesh Gopinath, chief financial officer of TCS, is confident that for the next two quarters, the company will be able to maintain its margin in the 26-28 per cent band subject to currency volatility. He added TCS would continue its strategy of reinvesting into business, and would rework the strategy once currency is stable.

“Any kind of cross-currency volatility is challenging from a business perspective to the extent that you need to calibrate your decision in terms of investment and what to focus on. Our preferred route is not to react to the currency market immediately, but to wait till it settles down and continue with the business cycle,” said Gopinath.

A year ago, when the Indian rupee was at 57-58 to a dollar, the company saw a one-off gain that benefited its margins 300 basis points, lifting it above 30 per cent in one of the quarters. “At that time, we actually ran on higher margins for a few quarters,” said Gopinath. “After one or two quarters, we did come up our overall investment. We have continued to invest and ramp up our investment in digital; we increased our exposure in continental Europe and for this quarter; we consolidated our Japan joint venture. All these activities are incrementally margin-dilutive in the short term. As currency moves in different directions, we will wait and see,” he added.

Gopinath defended the company's Q2 performance for which TCS stock was impacted and was down almost 8.7 per cent on Friday. He though acknowledged that a soft Q2 would impact the FY15 growth numbers. "Ideally we would have liked it to be a little better, but the numbers and the sources of growth for the quarter has been good. It does, however, puts us in a challenging position in beating our last year's reported growth numbers at an aggregate level. It is unlikely that we will recoup the small miss that we have had. To do better than FY14 will be difficult," said Gopinath.

For FY14 TCS has reported a growth of 16.2 per cent on constant currency basis. Several of the analyst however said that the company will do better than Nasscom's growth target of 13-15 per cent. Axis Capital in its note post the numbers predicted that TCS FY15 growth will be lower than FY14 at 15.9 per cent.

What is also bothering him is the cross currency volatility that will be a drag on the third quarter (ending December 2014) considering the quarter will have furloughs and more non-working days. "If the currency remains volatile and the overall softness during the quarter, I think these issue will be a drag on Q3. But the extent of impact will be clear only towards November," he added.