Mumbai: Tata Consultancy Services Ltd, (TCS) India’s largest software services company, reported its net profit rose 2.5% in the second quarter from the preceding three months, missing analysts’ estimates, even as the management said it was optimistic about getting new orders.
Despite the overall economic gloom in European and American markets, from which Indian information technology (IT) companies earn most of their revenue, chief executive and managing director N. Chandrasekaran was positive about the outlook.
“Based on all the checks that we’ve done, even though the macro uncertainty continues and there is lot of negativism, we’re getting positive vibes from customers in terms of their IT spends going forward,” Chandrasekaran said. “Our customers are investing significantly in terms of driving efficiencies of their businesses and are also making commitments from a discretionary spend point of view.”
The US and Europe, despite a slowdown in growth, are still the world’s largest IT markets. Over 70% of the revenue of the $76 billion Indian IT industry still comes from these markets.
TCS CEO Natarajan Chandrasekaran. Bloomberg (File Photo)
Smaller rival Infosys Ltd last week revised its US dollar revenue growth forecast for the current fiscal to a lower-than-expected 17.1%-19.1% from 18%-20% earlier.
TCS said that during the quarter it successfully won 10 large deals that were worth at least $100 million, with five coming from North America, four from Europe and one from Latin America.
The company added 35 new clients in the quarter ended September.
“The deal signings are healthy and we’re not getting any nervous comments from our customers, the macro is unstable and worrisome with a lot of negativity out there. I can’t say that everything is behind us but the fact is we’ve been able to deliver a 6.25% volume growth in these conditions,” Chandrasekaran said.
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According to International Financial Reporting Standards, net profit for the July-September period rose to Rs 2,439 crore, missing the median estimate of 28 analysts polled by Bloomberg, which expected net profit at Rs 2,520 crore. Revenue rose 7.7% from the previous quarter to Rs 11,633.50 crore.
During the quarter, volumes grew 6.25%, with the North American markets clocking 9% growth, the UK growing by 10%, the rest of Europe about 9% and Asia Pacific by 10%. India disappointed with a decline of 4%, while Latin America grew by 3%.
Among industry verticals, energy and utilities grew by 20%, followed by retail, travel and transportation. Manufacturing and banking and financial services grew between 9% and 12%.
An analyst with a foreign brokerage, who declined to be named, said that while missing the market estimates was negative, “the overall body language was positive”.
“The outlook for the global market for business and government purchases of technology goods and services will see slowing, though still positive growth, in 2012,” Forrester Research’s Andrew Bartels said in mid-September. “Growth in 2011 will be better, because vendors have had two quarters of generally strong demand before economic weakness surfaced in July and August, and that weakness won’t lead to slower technology market growth until the fourth quarter of 2011.
In addition to the 10 large deals that the company closed during the quarter, it is also chasing 10 other such deals that are worth at least $100 million.
Chandrasekaran said that clients were investing significantly to drive efficiencies and also making commitments for discretionary spending.
However, he warned that while there were no cuts in pricing being demanded at the moment, the chances of raising prices in the immediate future was bleak.
“There is a marginal dip in pricing in the current quarter, close to 90 basis points... but overall the pricing environment is pretty stable and we don’t see an opportunity to increase prices in the immediate quarters primarily because of the uncertainty in the macro. We think the pricing will hold plus or minus a few basis points,” TCS’s Chandrasekaran said. One basis point is 0.01%.
In the July-September period, most brokerages downgraded Indian IT stocks following the deteriorating macroeconomic situation in the Western markets. Analysts feared decision making on IT budgets could be hit because of the slowdown.
“While management comments continue to reflect a stable near-term outlook, there is uncertainty on demand pipeline going into 2012. We note that historically, IT services growth lags gross domestic product by six-eight months. As customers start their budgeting process, a deteriorating outlook for 2012 could impact the dollar value of IT budgets,” a 6 September Goldman Sachs report had said.
Citigroup Inc. analysts also examined the correlation between revenue growth of the top four Indian IT services firms and the S&P 500’s operating earnings over the past 48 quarters, which showed a strong correlation with a lag of three quarters.
Ashwin Ramarathinam contributed to this story.