Mumbai: India’s largest software services company Tata Consultancy Services Ltd (TCS) said on Monday that net profit for the three months ended December rose 26.7% from a year earlier, beating analysts’ expectations in a seasonally weak quarter and auguring well for the troubled $70 billion Indian information technology (IT) exports business.
Net profit rose to Rs.3,550 crore while revenue rose 21.7% to Rs.16,070 crore in rupee terms. The results were, however, slightly disappointing in terms of business volume.
Net profit and revenue increased 3.4% and 2.9%, sequentially, in rupee terms, while operating margin widened 56 basis points (bps) to 27.3%. One basis point is 0.01%.
In dollar terms, TCS posted revenue of $2,948 million, up 14% year-on-year (y-o-y) and 3.3% sequentially. Net profit at $652 million was up 14.8% y-o-y and 1.4% sequentially. Operating margin expanded 51 bps to 27.3%.
Analysts had expected TCS to post a dollar revenue growth of 3.1% from the preceding quarter and estimated a margin decline of 20 bps quarter-on-quarter. Large IT firms were expected to increase volume 2-3% sequentially, with TCS in the lead.
On Friday, Infosys Ltd also beat expectations when it reported net profit of Rs.2,369 crore, up 12.1% y-o-y and its first positive news since June last year when it stopped quarterly revenue forecasts.
TCS gained 2.14% to Rs.1,334.30 on Monday on BSE ahead of the results announcement. The Sensex rose 1.23% to 19,906.41 points and the IT index gained 2.57% to 6,413.25 points. Infosys gained 3.49% to Rs.2,807.25.
Since the beginning of the year, TCS has gained 6.02% while the IT index has risen 12.83% and the Sensex advanced 2.47%. Infosys has gained 21.08%, but almost all of this was registered after the results announcement on 11 January. Wipro Ltd has advanced 5.97% and HCL Technologies Ltd 8.49%.
Some analysts aren’t celebrating the revival of the IT business yet.
“We remain unsure on that front just yet. However, the latest result is forcing us to take a relook at TCS’ fair valuations,” wrote CLSA analysts Nimish Joshi and Arati Mishra. “Growth (3.3% sequential and 14% compared with a year ago) in the seasonally weaker December quarter is in line with expectations but creditable given TCS’ scale.”
The October-December quarter is typically a weak period for IT companies because of holidays in the US and Europe for Christmas and New Year. The US and the UK are the main markets for Indian IT firms, accounting for more than 85% of revenue.
Chief executive officer and managing director N. Chandrasekaran said TCS “had an excellent quarter of well-rounded performance”. He also pointed to performance going forward.
“We will beat Nasscom’s growth forecast this year (a prediction of 11-14%) and 2013-14 will be a better year than 2011-12 as we see the momentum is good,” he said. “Our utilization rate is 81%, can go up to 82-83%. Deals are coming from across markets such as retail, financial services and transportation.”
In the December quarter, TCS’s manufacturing practice gained the most with a 5.8% growth over the trailing quarter. Sequentially, the banking, financial services and insurance (BFSI) practice grew 3.5%, while retail and distribution segment grew 2.8%. The life sciences and healthcare business grew 3.7%, but the telecom sector’s growth dipped 4.6% sequentially.
Dipen Shah, head of private client group research at Kotak Securities Ltd, said, “TCS revenues came in line with estimates. While volume growth was relatively subdued at 1.25%, average realization surprised with a growth of about 1.3%. The margin performance was better than what we had estimated it to be. The volume growth was subdued due to furloughs even from sectors like BFSI. However, we expect growth rates to pick up, going ahead. The company has indicated confidence in 4Q and FY14 on the back of strong traction and continuing demand.”
TCS numbers are lower compared with Infosys on the volume growth front (1.25% versus the estimate of 3% sequentially and 1.5% volume growth in the IT services business of Infosys), according to Rikesh Parikh, vice- president (market strategy and equities), Motilal Oswal Securities Ltd. However, he added that margins in terms of constant currency are better. “Management commentary post numbers is encouraging with indication of better visibility in FY14,” he said.
Attrition in IT services dipped below 10% in the December quarter, while the number of $100 million-plus clients increased to 16 from 14.
At the end of the December quarter, TCS had 263,637 employees. The net addition was 9,561 employees. Non-Indians, representing 112 nationalities, formed 7.6% of the total employee base. Women made up 32% of the workforce. Utilization in the third quarter was at 81.7% (excluding trainees) and 72.1 % (including trainees).
“We hired almost 50,000 professionals in the first three quarters of this financial year to support business growth and we continue to forecast a healthy growth in the workforce numbers going forward,” said Ajoy Mukherjee, executive vice-president and head (global human resources).