TCS 'engines' working well in all markets

Firm's profit and revenues grow by 34% each in the September quarter

Tata Consultancy Services (TCS), India’s largest IT services provider, once again outshone rival Infosys in every respect in its financial performance in the quarter ended September 30.

In line with its strong show in recent times, the Mumbai-based company’s net profit grew 33.9 per cent over that in the same period last year to Rs 4,702 crore, according to IFRS accounting standards. The revenues, backed by some strong deals and broad-based growth from almost all industry verticals and geographies, surged 34.3 per cent to Rs 20,977.24 crore on a year-on-year basis.

On a sequential basis (compared with the trailing quarter), TCS’ net profit grew 23.9 per cent and revenues 16.6 per cent during the July-September quarter. In comparison, Infosys, the country’s second-largest IT services company, had reported 1.4 per cent growth in net profit on a year-on-year basis and 1.6 per cent on a sequential basis.

ON A HIGH

7.3% Volume growth, the highest in nine quarters
30.1% Operating margins the best ever
17,362 Gross addition of employees
8 Large deals signed
22 $100-mn-plus clients (up from 19)

TCS, the customers of which include Citigroup, BP Plc and AstraZeneca Plc, expects its deal pipeline to be strong in the 2013-14 financial year.

The TCS management, bullish on the macro environment, said there was no negative sentiment so far on future budget spend and the deal pipeline looked good going forward, too.

“It’s a terrific set of numbers that we have delivered because of superb execution. The Alti acquisition also had a positive impact of 1.2 per cent. We have demonstrated all-round strong growth across markets and industries, highlighted by efficient and rigorous execution,” said CEO & MD N Chandrasekaran.

The results were largely in line with the Street expectation but what surprised analysts was volume growth and margin improvement.

TCS’ volume growth (in billed man-hour in a quarter), of 7.3 per cent, was the highest for the company in the past nine quarters and expanded its margins by 330 basis points to 30.1 per cent, primarily aided by currency benefits.

TCS’ chief financial officer, Rajesh Gopinathan, said a falling rupee added 300 basis points to its operating margin, while operational improvement boosted it by another 30 basis points.

The operational improvement primarily came due to a rise in employee utilisation rate (83.4 per cent, excluding trainees). Infosys, on the other hand, had reported 3.1 per cent volume growth, while its operating margin had remained unchanged at 23.5 per cent, despite the currency benefit.

The growth during the quarter was led by almost all the industry verticals, such as life sciences, media, energy & utilities and banking, financial services & insurance (BFSI). All core markets saw decent growth, with Europe, North America and the UK leading the pack.

The company signed eight large deals during the quarter which took the number of its $100-million-plus clients to 22, from 19 in the previous quarter. “Deal wins were distributed across segments and our demand pipeline is very strong. We see tremendous opportunities going forward,” said Chandrasekaran. However, he sounded a note of caution for the third quarter, saying Q3 was always a seasonally-weak quarter, dominated by furloughs (extended holidays).

Of the eight large deals won during the quarter, two came from the banking industry, two from telecom, one each from hi-tech, utilities, retail and CPG & lifesciences.

“Companies like TCS are growing in teens — it has seen topline growth of more than 15 per cent. And, this is the quarter when the year-on-year currency depreciation of 13 per cent has significantly boosted profits. TCS has been better off on the utilisation front.The onsite revenue for TCS is high which is a big positive. We expect TCS’ profit to grow more than 25-30 per cent in each of the next two quarters, too,” said Rikesh Parikh, vice-president (institution corporate broking), Motilal Oswal Securities.

Gopinath said the company was quite hopeful of maintaining its operating margin at 26-28 per cent. “We believe 26 to 28 per cent is fairly stable; foreign exchange will continue to impact either way, but we are structurally sound to guard margins at 26-28 per cent,” he added.

During the quarter, TCS added 17,362 employees on a gross basis, taking its total headcount to 285,250.