Mumbai/New Delhi: India’s largest information technology (IT) company Tata Consultancy Services Ltd (TCS) echoed the caution evident in Infosys Ltd’s guidance for the year to March that the Bangalore company announced last week. While the smaller HCL Technologies Ltd sounded a more optimistic note, analysts attribute much of this to currency movements and will likely moderate their expectations from the sector.
Mixed bag’:Tata Consultancy Services CEO N. Chandrasekaran.(Abhijit Bhatlekar/Mint)
Last week, Infosys, India’s second largest software services exporter, disappointed the market by lowering its dollar revenue forecast for the second time this fiscal year, and market participants questioned the firm’s bellwether status.
Investors keenly track projections the large IT firms make to gauge the direction of the sector, especially as clients in the US and Europe battle struggling economies and may have to pare their IT budgets.
TCS does not give revenue forecasts, and while the management sounded positive on both the deal pipeline as well as pricing of deals, it added a note of caution.
“A significant majority of our clients have closed their budgets and it’s a mixed bag,” said N. Chandrasekaran, chief executive and managing director of TCS, while adding that the deal pipeline was “quite good” and things were going well on the ground.
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With TCS announcing robust third quarter earnings, its CEO and MD, N. Chandrasekaran, talks about client spends, the European market and the effect of seasonal variations
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“Projects which are discretionary in nature—we find some of them are taking longer, which can be attributed to the deeper due diligence that the clients are doing,” he added. Overall, estimates for the March quarter may have to be moderated, Chandrasekaran said.
TCS added 40 new clients during the quarter under review, and signed 10 large deals across verticals.
HCL Tech, on its part, signed 18 new deals between October and December, adding over $1 billion (Rs 5,100 crore today) in revenue during the quarter, a lot of it “not from growth in IT spend, but from churn from old vendors to new vendors”, said Vineet Nayar, vice-chairman and chief executive.
In 2012, HCL Tech expects similar renewals worth about $47 billion to come up. “This is what makes us optimistic in a very pessimistic environment,” Nayar said.
For the December quarter, aided by the rupee’s sharp depreciation against the dollar and growth across markets, including the US and Europe, TCS’ net profit rose 21.8% over the preceding three months to Rs 2,803 crore. Revenue increased 13.5% to Rs 13,204 crore.
Net profit increased 18.2% and revenue rose 36.6% from the year-ago period. The company’s numbers were in line with expectations. A Bloomberg poll of 31 analysts had estimated a net profit of Rs 2,857.29 crore on revenue of Rs 13,156.88 crore.
HCL Tech’s net profit rose 43.3% year-on-year to Rs 572.7 crore as revenue grew 34.9% to Rs 5,245.2 crore. Sequentially, net profit was up 15.3% and revenue rose 12.8%.
Infosys, too, beat market expectations to post a 24.4% sequential increase in net profit and a 14.8% rise in revenue, but disappointed with its forecast.
Indian IT services companies earn most of their revenue in dollars.
In dollar terms, TCS’ revenue rose 20.6% to $2.59 billion from the year earlier, while net income rose 9.1% to $568 million. The October-December quarter, though, is a seasonally weak one for all Indian IT companies because of fewer working days. The results showed this.
TCS saw a 3.2% volume growth in the quarter under review, almost half of the 6.25% volume growth it registered in the trailing quarter. Even Infosys posted only a 3.1% volume growth in the third quarter.
TCS’ operating margin was up by 218 basis points to 29.2%. A basis point is one-hundredth of a percentage point.
TCS declared its results after market hours on Tuesday. It fell 0.28% to close at Rs 1,104.30 on BSE. HCL Tech rose 4.6% to end at Rs 424.75, while the BSE IT index rose 0.93% to 5,635.17 points and the Sensex gained 1.7% to 16,466.05 points.
Growth in the third quarter for TCS came across markets. Among mature markets, Europe led growth with 18.1% sequentially, followed by the US (13.3%) and the UK (9.5%).
According to Chandrasekaran, “While technology budgets are still being set for next fiscal, there is little doubt that technology is a key resource to help global businesses optimize their operations and fuel growth in the current economic climate.”
HCL Tech’s Nayar said the expected deal renewals worth $47 billion across 249 customers will result in at least a $15-billion opportunity.
“I truly believe we have an opportunity and a threat ahead of us,” he said. But “while the recessionary trend might be a threat for a lot of IT vendors across the world, we see that as a tremendous opportunity because lots of bets are off”.
However, revenue from new deals worth $1 billion for HCL Tech will only start pouring in after four-six months.
“While HCL’s 2% QQ (quarter-on-quarter) growth in $-revenues has met Street expectations, it fails to give confidence on demand trajectory for the industry,” Nimish Joshi and Arati Mishra of brokerage firm CLSA said in their report.
On the weakening of the rupee against the dollar, S. Mahalingam, chief financial officer of TCS, said the foreign exchange fluctuation had a negative impact of around Rs 300 crore on the company, compared with Rs 90 crore in the trailing quarter. “The level of currency and market volatility has only risen in the past three months and we are adapting our strategies accordingly,” he said.
HCL Tech suffered a foreign exchange loss of Rs 75.8 crore, although the weaker rupee led to a 260 basis points increase in the company’s operating margin, of which 150 basis points were reinvested into the business by means of pay raises and other bonuses, said Anil Chanana, chief financial officer.
CLSA analysts said that HCL Tech’s margin performance is largely cloaked by the currency movement. “The 18.5% Ebitda (earnings before interest, taxes, depreciation and amortization) margin in the December 2011 quarter is the same as June 2011 quarter despite a 15% currency depreciation since then. This shows the extent of moderation in core profitability for HCL Tech and will remain an overhang on earnings and stock performance ahead,” they said.
HCL Tech announced a dividend of Rs 2 per share and its earning per share stood at Rs 31.60, up 45.8% year-on-year.
john.k@livemint.com
Ashwin Ramarathinam in Mumbai contributed to this story.
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