Currency vagaries may hit revenues

TCS PUBLIC OFFER

Tata Consultancy Services (TCS) has warned its prospective shareholders that its revenues and profits could be adversely impacted by the fluctuation in the rupee vs the US dollar exchange rate, employee attrition, rising wage levels in the country and reduction or termination of tax incentives offered to the company.

In its red herring draft prospectus, the company has declared that in the fiscal year 2002, fiscal 2003 and the nine months ended December 31, 2003, the company derived 86.3 per cent, 81.8 per cent and 85.7 per cent, respectively, of its revenues from international business.

"Accordingly, our operating results have been and will continue to be impacted by fluctuations in the exchange rate between the rupee and the US dollar and other foreign currencies. Any strengthening of the rupee against the US dollar, the euro or other foreign currencies could adversely affect our profitability," says the red herring draft.

TCS has also pointed out that its employee turnover rate could adversely impact its business.

"Significant increases in our attrition rates will impact our ability to manage and execute client engagements effectively," says the document.

The attrition rate at TCS for fiscal 2002, fiscal 2003 and fiscal 2004 were approximately 3.6 per cent, 2.8 per cent and 6.5 per cent, respectively.

Issuing a warning about an inflation in its wage bill, TCS has said that due to the growing demand for IT professionals in India, it may have to increase the level of employee compensation in order to retain staff and remain competitive in the employment market.

As of December 31, 2003, the company had outstanding forwards of $179 million and option contracts of $25 million. However, these contracts may not adequately cover all the foreign exchange currency risks that it is exposed to, said the company.

Incidentally, 63.6 per cent of TCS' revenues in the nine months ended December 2003 came from the US.

In fiscal 2004 the US accounted for 52 per cent of Wipro's revenues and 71.2 per cent of Infosys Technologies' revenues.

TCS also believes that as a result of recent amendments and clarifications to Section 10A of the Income Tax Act, these tax incentives will continue to be available to them following the transfer.

Under current laws, the tax incentives available to its units located in software technology parks terminate on the earlier of the 10-year anniversary of the commencement of operations of the unit or March 31, 2009, says the company.

But it also warns that when tax incentives expire or terminate, its tax expenses will materially increase, reducing profitability.

Further, the government of India could enact laws in the future that may adversely impact its tax incentives and consequently, its tax liabilities and profits.