TCS: Differential strategy pays off

Margins see slight decline as projects in emerging economies are ramped up

It’s finally dawning on the market that the performance of Tata Consultancy Services (TCS) is no one-quarter miracle, but the outcome of a carefully charted strategy. TCS has surprised the market on all counts, not just by the growth in its net profit in Q2. Here’s the run order: Volume growth is up five per cent, revenues in constant currency up 4.8 per cent, utilisation is at 81.6 per cent (excluding trainees), 41 new clients added and net people additions stand at 10,531. “Every operational metric is showing healthy growth. The market really can’t ask for more,” says one analyst.

Though critics say net profit has been driven by other income, that too does not seem to be bothering the market much. In the past quarters, TCS has seen forex losses, but this quarter has seen gains, which has contributed to the post-tax profit. Similarly, margins are down marginally to 26.7 per cent from 27.4 per cent but that’s mainly due to ramp-ups in projects in emerging economies, where margins are lower than in the developed markets. The company has explained the reason behind this and analysts believe that to go after projects or economies which are not traditional outsourcers, is a positive development. After 2008, different companies have adopted different strategies to grow their business. Ankita Somani of Angel Broking, says: “TCS has adopted a model of going into new geographies and new service lines, which is paying off now. Therefore, the marginal decline in margins is not something to worry about.”

This is evident from the broad-based growth that the company has witnessed across geographies. Though growth was led by markets like the UK and Europe, growth markets like India, Asia-Pacific, Latin America and the Middle East performed well. Growth across verticals has also been rather encouraging. While financial services vertical’s relative performance is not as expected, retail, manufacturing and telecom have performed well. There are several first-time outsourcers that the company has managed to target and that has helped deliver the volume growth. In a rather challenging operational environment, infrastructure has grown in double digits as well.

No doubt, TCS is well armed for the future, with its focus on new clients and new geographies, but the numbers also indicate a secular slowdown in the industry. Compared to the corresponding quarter in the previous year, the company’s revenues are up a mere 13 per cent in dollar terms. Despite the stellar performance, the signs of a slowdown cannot be ignored. Now it’s apparent that even Tier-I companies will report divergent growth rates. Therefore, it’s apparent HCL Tech and TCS will lead the industry’s growth because of their differential strategies, while others will lag. Call it the new normal, if you please.