TCS marches on, says Q4 not a concern

TCS marches on, says Q4 not a concern
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First Published: Thu, Jan 17 2008. 12 27 AM IST

TCS chief executive  S. Ramadorai
TCS chief executive S. Ramadorai
Updated: Thu, Jan 17 2008. 12 27 AM IST
Mumbai: Tata Consultancy Services Ltd, India’s largest software services firm, reported profits of Rs1,326.67 crore for the three months to December, almost one-fifth more from a year ago, riding increased business volumes in a quarter the Mumbai firm signed a $1.2 billion, or Rs4,740 crore, tech services contract with audience measurement firm Nielsen Co.
Revenues at the firm, commonly referred to as TCS, expanded 21.5% to Rs5,923 crore in the quarter, the third in fiscal 2008. The revenues were lower than estimates in a Mint poll of six analysts. The average of the poll anticipated revenue growth of 22.6% to Rs5,960 crore for the firm.
TCS chief executive S. Ramadorai
Compared to nearest rival Infosys Technologies Ltd, TCS’ profit expansion was slower, but growth in revenues outpaced the Bangalore firm’s. Infosys on Friday reported a 25% growth in net profits to Rs1,231 crore and a 17% growth in revenues to Rs4,271 crore. “Though TCS’ topline growth was better than that of Infosys, the Bangalore firm had an edge over TCS in terms of margins and profit growth,” Angel Broking Ltd analyst Harit Shah said.
The net profits at Mumbai-headquartered TCS were aided by financial income of Rs119 crore, more than three times the comparable figure in 2006. At the Ebitda (short for earning before interest, tax, depreciation and amortization) level, the margin at TCS was 28.5% versus 29.3% in the December quarter of fiscal 2007. Ebitda margin is a metric followed by most analysts to measure the profitability of operations of most businesses. Infosys had reported an Ebitda margin of 32.59%.
“We had higher expectations on Ebitda margins (for TCS),” said Harshad Deshpande, an analyst at First Global Stock Broking Pvt. Ltd of the results announced after market hours.
Shares of TCS were the only large information technology stock to rise in Wednesday trades, before the results were announced—up 0.67% to close at Rs944.5. Shares of Infosys fell 0.51% to Rs1494.15; Wipro Ltd lost 0.76% to Rs456.5; while Satyam Computer Services Ltd shed 2.09% to close at Rs379.85. The 18-stock IT Index at the Bombay Stock Exchange, or BSE, slipped 0.71% to 3,882.88 points. Of the 18 stocks, just four reported a positive advance. The bourse’s benchmark index, Sensex, fell 382.98 points—closing the day at 19,868.11.
Wipro declares its results on Friday and Satyam on Monday.
An analyst pointed to a slowdown in business volume growth measured by quarter-on-quarter or sequential increase. In the quarter gone by, TCS expanded revenues by 5.3% over the preceding September quarter, which was much lower than 7.9% in the December quarter of fiscal 2007. A lower volume growth for TCS and Infosys (which reported a 4.5% sequential growth in revenues), said Gaurav Dua, an equity analyst at Mumbai brokerage Sharekhan Ltd, suggests that there could be a slowdown in overall demand for tech and back-office services rendered from India.
“The apprehension of a slowdown still stays,” Dua said, even though N. Chandrasekaran, chief operating officer at TCS, said there was no evidence yet of a delay or postponement of tech spending by US clients. Customers in the US comprise the biggest geographical market for TCS; North America accounted for almost 49.5% of TCS revenues in the December quarter, nearly 3 percentage points lower than the share from that region in the preceding quarter. Economists have warned of a slowdown in the US, the world’s biggest economy, on the heels of last year’s subprime financial crisis.
“The jury is still out whether it is a recession or how long it will last,” S. Ramadorai, TCS’ chief executive and managing director, told reporters. “We appreciate the situation that these customers are facing. And are well positioned to work with them on not only transformation projects but also utilizing the budget very effectively and efficiently.”
Results of tech firms in the US reflect no slowdown in their businesses. International Business Machines Corp. and SAP AG this week posted results that topped analysts’ projections, signalling that computer companies may weather an economic slowdown in the US.
TCS’ revenues from clients in the banking, financial services and insurance business as a percentage of total revenues grew to 44% from 43.3% in the September quarter. “The travel and hospitality segments as well as the energy and utility verticals also grew faster than the average company growth,” the company said in a statement. A $200 million contract with the Social Security Institute of Mexico was one of the highlights of the quarter.
Chandrasekaran said TCS was pursuing 25 deals in the $50 million (Rs196.5 crore at today’s rates) to $100 million range and more. This “is a good demand environment and we continue to see upward pricing bias,” he said.
TCS took a 1.61% hit at the Ebitda level on account of an appreciating rupee against the euro. In the earlier two quarters of this fiscal year, the company, like other exports-dominated tech service firms, had suffered from a rupee strengthening against the US dollar. The Indian currency has appreciated some 14% against the dollar through 2007, but just about 1 percentage point of that appreciation was in the December quarter with comparable numbers in the preceding two quarters being 6.36% and 2.24%, respectively.
For TCS, the net employee additions for the first nine months stood at 18,817 (taking total workforce to more than 108,220) compared with 16,900 in the corresponding period last year.
Shares of TCS declined 11% last year, compared with a 47% gain in the BSE’s sensitive index. Still, that’s better than the performance of its biggest domestic rivals. Infosys was the worst performer on the benchmark sensitive index, with a 21% decline. Wipro, ranked third by revenues among tech service firms, fell 13%.
One analyst predicted the stock would rebound. “The stock is dirt-cheap. It is now trading at price earnings multiples of 13 times of fiscal 2009 earnings compared to the Sensex trading above 21 times,” said Nimesh Mistry, an analyst with Man Financial (India) Ltd, part of Man Group Plc. “It is definitely a buy from here.”
Vishwanath Kulkarni in Bangalore, Nesil Staney in Mumbai and Bloomberg’s Harichandan Arakali contributed to this story.
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First Published: Thu, Jan 17 2008. 12 27 AM IST
More Topics: TCS | Infosys | Software | Q3 results | Ebitda margin |