India’s largest IT services provider Tata Consultancy Services (TCS) is using the current depreciation of rupee to gain new deals and structures that may not meet current profitability criterion.
In a recent analyst meet when asked if the company would have gone ahead with Friends Provident deal if rupee would have been depreciated, senior TCS officials reply was negative. “The sense we got was that the company may continue to have this investment strategy if the rupee continues to be weak,” said an analyst who attended the meet on condition of anonymity.
Analyst were divided on TCS strategy of looking at deals and structure. “Reinvestment in our view is an expense that is discretionary in nature and can be pulled back if the P&L demands so. However, long-term deals that are contracted based on short-term rupee movements fail to meet our criteria of reinvestment and can be a material risk to the P&L if the currency changes course. At a general level, such ‘reinvestments’set a dangerous internal precedent though strong institutionalization of processes and a hands-on and dynamic CEO may ensure that such luxuries are not relied upon internally to meet targets,” said Kawaljeet Saluja, Rohit Chordia and Shyam M of Kotak Institutional Equities Research in their report.
However, a set of analyst believe that TCS strategy to reinvest rupee gains into new deals makes business sense. “My take is that for a $10 billion company if they want to continue to grow in double digit growth they will have to take risks. Rather the company said that they had assumed rupee to be at 48 level and anything beyond this will be re-invested into business,” said Ankita Somani, IT analyst at Angel Broking.
Last year, TCS signed a 15-year deal with UK-based Friends Life--a provider of pension, investments and insurance-- worth $2.2 billion. With this deal Diligenta, the subsidiary of TCS, assumed the administration responsibility for 3.2 million policies for Friends Life.
On business environment the company maintained its stand that growth will be front-ended and also reiterated that it will be able to meet growth target, that is, growing faster than Nasscom’s estimate of 11-14 per cent. TCS will need to deliver 3.4 per cent compounded quarter growth rate to be able to meet the top-end of Nasscom’s revenue growth guidance for the industry.
TCS, is expected to report a volume growth lower that Q1 of FY13, wherein it reported a volume growth of 5.3 per cent. The company also indicated that margin growth could be muted due to growth momentum from markets like India and APAC which generally has lower margins. This quarter will also see a higher intake of freshers joining the company and more work onsite.
“The IT major has alluded to some deal ramp-ups in 2QFY13, which is likely to lead to an onsite shift and some pressure on margins during the quarter, given higher costs typically associated with onsite delivery,” said Harit Shah of Nirmal Bang in his report.