TCS: The empire strikes back

Deal pipeline looks robust despite rhetoric on macro issues.

It is official now. India’s Information Technology (IT) gravy train hasn’t derailed. Despite the rhetoric put out by the bosses of technology companies on macro headwinds, the quarterly numbers tell a different story. The off-shoring story remains valid.

After HCL Technologies, TCS met the Street’s expectation on most counts. In its after-result note, CLSA said good top line growth should allay investor concerns on industry-wide demand, which had arisen after a poor Infosys report. “A 4.7 per cent quarter-on-quarter growth in dollar revenues is in-line with the Street expectations (slightly below our expectations of 5 per cent but healthy nevertheless).”

For the quarter ended March 31, the company clocked revenues of Rs 10,157 crore, up 31.3 per cent year-on-year and 5.1 per cent, sequentially. Net profit climbed to Rs 2,623 crore, up 31.1 per cent y-o-y and 10.7 per cent sequentially. The company added 39 new clients in the quarter, evenly spread across verticals and deal sizes. The deal pipeline looks very good, believe analysts, and the company’s plan to hire 60,000 people this year is an indication of the good momentum in business.

TCS has managed to grow across verticals, except telecom, and has not faced any client-specific issues or delays in starting projects in the entire year. One of the reasons Infy had cited for volatility in revenues and utilisation was due to projects not starting on time. Also, analysts claim revenues that British Telecom have dropped for other IT companies could be a possible reason why Infosys suffered in the fourth quarter. However, TCS has been lucky as there have been no issues on the client-side.

But it’s not mere coincidence that TCS has delivered on almost all parameters. In FY11, TCS spent nearly Rs 6,000 crore on sales and general administration (SG&A), 17.18 per cent of revenues. While this is on the higher side, analysts believe it is money well spent as the company has managed to translate it into growth. However, the concern is since the company has moved into a high margin trajectory, thanks to improved efficiencies and better utilisation, the challenge that TCS will face is to maintain margins at these levels without increasing SG&A. Dipen Shah of Kotak Securities says, the company will now have to grow revenues faster and leverage costs better.