TCS: Banking boost

Improving demand from the US financial sector helps shore up numbers.

Helped by higher spending by clients from financial services, healthcare and utilities sectors, TCS posted better-than-expected results for the September 2009 quarter. Continuing the trend seen in the previous quarter, the company delivered a 3.2 per cent growth in consolidated revenues on a sequential basis, which is much better than the 0.5 per cent growth posted in the June 2009 quarter.

North America is an important market for Indian IT companies and TCS managed to further consolidate its position, as the US economy showed early recovery signs. North America’s share in the overall pie increased by 110 basis points to 53.4 per cent and was able to more than offset the decline in Europe’s share during the quarter. Business from a key telecom client has been under pressure for some time and the company believes this is bottoming out. Along with new deals — five of the 10 new large deals signed during the quarter were from the UK and Europe and with clients in retail and utilities, things should hopefully start looking up from the current quarter.

Among the verticals, BFSI has shown the highest growth in all geographies, including the US. However, telecom and manufacturing haven’t come out of the woods yet, but the company expects things to bottom out soon. The company was able to derive better business from its top 10 clients due to enhanced focus and product offerings.

Overall, the volumes improved by almost 5 per cent sequentially. But, the pricing was seen under pressure, mainly due to a change in the revenue mix. For example, BPOs’ revenue share was up 40 basis points and emerging markets’ share also rose. Likewise, the share of offshore revenues, wherein realisations are lower, also increased. Thus, the overall growth in revenues was lower than the volume growth of about 3 per cent.

More important, the company’s margins were at 28.5 per cent, higher by 120 basis points than the June 2009 quarter. Higher off-shoring, gains in productivity and cost-cutting measures helped here. Thus, overall net profits increased 7.1 per cent to Rs 1,642 crore.

Going ahead, while signs of revival are visible, the management looks cautiously optimistic. That’s not surprising, given that even as the demand momentum in application and maintenance services segment is expected to sustain, clients continue to delay discretionary spending, especially in the enterprise and product implementation space. At Rs 609, the stock is trading at 19 times estimated 2009-10 earnings. While it has outperformed the BSE Sensex and IT indices since June 2009, it could continue to do so but the margin of outperformance is likely to be lower, given the overhang of a stronger rupee.