TCS: Falling in line

The company managed currency headwinds in 2009-10 and expects a strong volume growth in future.

The fourth quarter results of India’s largest information technology exporter, Tata Consultancy Services (TCS), were in line with the Street’s expectations, with net profits beating estimates convincingly.

The company reported dollar revenue growth of 3.1 per cent compared to the previous quarter, driven by a 4 per cent volume growth and stable pricing. Infosys’ volumes grew 5.2 per cent, beating TCS’s volumes for the first time in the past three quarters.

However, currency impact was visible with flat rupee revenues (up 1.1 per cent). Despite currency headwinds, the company increased its operating margins by 50 basis points as compared to the previous quarter, in contrast to Infosys that saw a dip of margins by about 150 basis points. Despite the negative impact of currency fluctuations (190 bps), TCS was able to offset that by productivity gains and other cost cutting measures like reduction in the selling and administration expenses.

Compared to muted revenue growth, the net income front had better news; It grew 7.4 per cent sequentially to Rs 1,931 crore in the fourth quarter on account of higher other income, aided by forex gains and a sequential decline in the effective income tax rate.

With demand environment improving, TCS saw growth in all verticals this quarter. Going ahead, the company expects a strong volume growth to continue from banking, financial services and insurance (BFSI), retail and life sciences. Overall, the company won 10 deals during the quarter, of which three were of the order of $125 million or more, indicating a healthy deal pipeline.

TCS recorded a net employee addition of 10,110 in the recently concluded quarter and hopes to add another 16,000-17,000 in 2010-11 reflecting confidence in the business outlook.

The stock ended 2.8 per cent lower at Rs 789.50 at the National Stock Exchange on Monday. It trades at 21x FY11 and 19x FY12 estimated earnings and can be considered on dip, say analysts.