Currency swings see TCS net rise just 2.7%

Currency volatility badly hit the revenue and net profit of India’s largest IT services provider Tata Consultancy Services. The company recorded a net profit (consolidated Indian GAAP) of Rs 1,362 crore for the quarter ended December 31, 2008 -- up a mere 2.68 per cent over the corresponding quarter figures of Rs 1,327 crore in FY07. Net profit was higher by Rs 41.53 crore due to lower depreciation charges.

Revenues at Rs 7,277 crore were up 24.13 per cent over the corresponding quarter figures of Rs 5,923 crore. The rupee had fallen almost 11 per cent against the US dollar in this period. Sequentially, net profit in rupee terms was up 4.65 per cent and revenue up 7.10 per cent.

However, slowing business growth was evident from the fact that in US GAAP terms, the company’s revenues at $1,483 billion were flat year-on-year (y-o-y), but fell 5.8 per cent quarter on quarter (Q-o-Q). This was primarily because TCS deals with other currencies like the Euro, British pound —both of which fell against the US dollar and decreased its earnings. Hence, its net income, too, at $276 million was lower 18.0 per cent Y-o-Y while it fell 3.5 per cent Q-o-Q. IT companies earn in dollars and spend in rupees. TCS suffered a forex loss of Rs 251 crore.

The revenue performance of Infosys was better in dollar terms (US GAAP). Its third-quarter revenue rose 8 per cent YoY, but fell 3.7 per cent QoQ. The IT bellwether had lowered its revenue forecast in dollar terms for fiscal 2009 while it marginally upped its revenue forecast in rupee terms for FY09. TCS, on its part, does not give guidance. The company’s EPS stood at Rs 13.92, and it declared a quarterly dividend of Rs 3 per share —its 18th consecutive quarterly dividend.

The TCS management said that revenues from the Citi arm (whose acquisition it has completed) will be reflected in its books from the fourth (next) quarter. It added that it’s open to servicing clients of the beleaguered Satyam Computer Services if they approach it.

Operational metrics: In terms of markets, North America appears to be stabilising with TCS adding two new marquee customers during the quarter. The revenue from this region grew 2.5 per cent sequentially. TCS’ strong pan-European presence in the UK helped the company grow revenues in a sluggish market. But, compared to the trailing quarter, revenue from this region fell 1.7 per cent. The company’s India revenues to fell 1 per cent to 6.8 per cent.

Segment-wise, revenue from the banking, finance, services and insurance (BFSI) sector was flat sequentially while telecom dropped 1.5 per cent and manufacturing by 0.4 per cent. Consumer spending-led sectors like retail and media and entertainment exhibited resilience in the October-December quarter, while ramp-ups in large transformation deals signed in earlier quarters helped retail and life-sciences verticals show strong growth, the management said.

Pricing was just about stable this quarter which was evident from the fact tha the company’s top client revenue was down 0.8 per cent while the revenue from its top five clients was down 0.5 per cent. Chief Executive Officer and Managing Director, S Ramadorai, said: “In tough market conditions, TCS continues to perform in a stellar fashion, driving revenue growth through our diversified market presence and boosting our operational profitability by conserving costs and creating efficiencies.”

S Mahalingam, Chief Financial Officer, noted that in the current environment, “it is important to run a tight ship with cost control measures that can be sustained while continuing to invest for the future”. The company’s selling, general and administrative (SG&A) expenses reduced by 153 basis points (bps) implying it kept its cost under control.

“In a challenging market, TCS remained focused on execution discipline and kept pricing stable and therefore managed to grow profitably.” said N. Chandrasekaran, Chief Operating Officer. “We have closed some key deals across markets and sectors, acquired 41 new customers and have a healthy pipeline of deals across our diversified customer going forward.” Its operating margins, however, rose just 53 bps.

Hiring: uring Q3, there was a gross addition of 11,773 employees (net 8,692 employees) of which 8,704 were trainees and 1,696 were lateral recruits in India and 1,373 employees were added in overseas subsidiaries and branches. The total employee base was 130,343 professionals and 52 per cent of the workforce had more than three years experience.

The utilisation rate (excluding trainees) was 79.9 per cent (it fell 1.2 per cent this quarter) and the attrition rate in Q2 dropped to 11.9 per cent overall with 11.2 per cent attrition rate in the IT services business and 20.5 per cent attrition rate in BPO. Foreign nationals formed 9.1 per cent of the total employee base and 30 per cent were women.

“We have added over 30,400 people in the first nine months which is in line with our hiring plans for the financial year. Our retention rates for both IT services and BPO have shown significant improvement in the current quarter. We continue to focus on improving utilization rates and employee productivity,” said Ajoy Mukherjee, Vice President & Head, Global Human Resources.