The worst seems to be over but the near-term upsides are factored into the price.
With clients in the banking and financial services space apparently in better shape than feared, Tata Consultancy Services (TCS) was able to post strong dollar revenues in the June 2009 quarter. TCS has several Wall Street clients that have been in some trouble due to the financial crisis that erupted in the US markets last July.
But they seem to be recovering because TCS’ business from the BFSI (banking, financial services and insurance) vertical grew 5 per cent sequentially. This helped the company clock a sequential growth of 3.3 per cent in dollar revenues with volumes rising 3.5 per cent, though realisations aren’t yet improving — pricing for the quarter dipped about 34 basis points.
A strong shift in revenues offshore and lower expenses on sales and other overheads helped push up EBIT (earnings before interest and tax) margins by about 110 basis points to 24.8 per cent. Also, analysts say that the company’s receivables collection cycle is down to 93 days from 105 days a year ago. Now that TCS’ bigger financial services clients don’t appear to be cutting back on IT spends as much as was apprehended, its revenues this year could grow in line with those of its peers.
Of course, these would be driven by volumes because pricing pressures are unlikely to ease in a hurry. It’s encouraging that the tech major continues to win new clients — it bagged more than half-a-dozen big deals in the June quarter. As such, revenues would be driven by ramp-ups in verticals such as retail, utilities and pharma (telecom remains a bit of a troubled spot) and are expected to rise 0.5-0.6 per cent in dollar terms.
The operating margin could sustain at the current level of 24 per cent or thereabouts, though once overseas customers start increasing their IT budgets, offshoring could come down with more work being done onsite. Besides, utilisation is high and could come off with additional hiring — TCS plans to hire nearly 25,000 newcomers over the rest of 2009-10. At the current price of Rs 499, the stock trades at nearly 16 times estimated 2009-10 earnings, while at Rs 1,973, Infosys trades closer to 19 times.
