TCS net up 36%, beating forecasts

TCS net up 36%, beating forecasts
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First Published: Mon, Jul 16 2007. 11 47 PM IST
Updated: Mon, Jul 16 2007. 11 47 PM IST
Mumbai/Bangalore: India’s largest software services company, Tata Consultancy Services Ltd (TCS), reported a 36.3% rise in first quarter profit to Rs1,203 crore, combating the effects of a soaring rupee and rising wages with tightly reined-in costs and higher pricing.
At Rs5,203 crore, TCS’ revenues for the April-June quarter grew 25.2% over the year-ago quarter.
Growth in revenues and profits, at 0.8% and 0.7% respectively, remained flat for TCS when compared to the fiscal fourth quarter ended March, but the latest performance was significantly better than that of its nearest rival Infosys Technologies Ltd, which last week reported a 5.7% sequential contraction in profits and also cut profit and revenue forecasts for the year.
TCS does not make sales and profit predictions. But its results beat, by a wide margin, expectations of analysts. Based on estimates by nine analysts, Bloomberg News had estimated a median net profit of Rs1,080 crore for the quarter.
Still, TCS’ earnings before interest, taxes, depreciation and amortization as a percentage of sales, a key measure of the company’s operational profitability, fell to 25% in the first quarter from 28.3% in the three months ended 31 March.
One analyst said business in the July-September quarter would also be under stress.
“If you look closely, both Infosys and TCS have guided for a slower growth in the next quarter and seem to be indicating for stronger volume growth in the second half of the year,” said Pankaj Kapoor, an equity analyst with ABN Amro India. “These companies will also be completing over two-thirds of their annual hiring by the next quarter (when the impact from hiring will be absorbed).”
TCS’ quarterly profits were aided by a 30% expansion in business from customers in banking and financial services over the January-March quarter, with the sectors adding 11 of the 54 new customers that TCS signed on in quarter. Customers from retail and pharmaceutical industries too boosted growth.
Addition of high-value clients—TCS doubled customers with $100 million deals in the quarter—and hiring of less-experienced programmers, who cost less, helped negate the effects of a rupee that advanced the most against the US dollar in the quarter in more than three decades.
The rupee is currently at Rs40.37 to a dollar and appreciated 6.8% in quarter ended 30 June.
“The company has mitigated the negative impact of strengthening rupee and wage hikes through hedging, productivity gains and cost management,” said S. Ramadorai, TCS chief executive officer and managing director. TCS said it had a 2.58% negative impact on its margins due to the rupee appreciation.
“Our increased pricing to clients and productivity improvements helped us gain 2.13% on our margin. Combining that with our hedging gains, we have been able to mitigate all negative impacts on our margin,” said S. Mahalingam, the chief financial officer of the company.
TCS has already entered into currency hedging contracts worth $2.5 billion for one year. For the current quarter that ends in September, the company has hedged the Indian currency at Rs41 to the dollar, Mahalingam added.
TCS, which increased its pricing of its services by an average 0.54% in the June quarter, is raising pricing on strong demand for its services. “We are now looking at an increase of 3-5% for the renewal of existing contracts and and increase of 5% for the new contracts in the September quarter,” said N. Chandrasekaran, the company’s head of global sales and operations.
TCS has also been successful in making its clients migrate to higher revenue band categories. Revenues from the company’s top 10 clients increased over 11%, Ramadorai said on a conference call with analysts.
The increasing migration of consulting work to offshore delivery centres in India was helping, Ramadorai said.
“For the first time, we have moved high-end consulting work offshore (nearly 25%),” he said, adding 64 of TCS’s top 100 clients had become consulting customers as well.
Meeting customer needs across the company’s five broad offerings—software products, consulting, back office services, information technology infrastructure, and assurance and testing—helped TCS improve sales substantially. “Out of 50 top clients that we have, 33 are currently having a full-service play,” said Chandrasekaran.
TCS, which ended the June quarter with nearly 95,000 employees, expects to add 11,000 in the July-September period, said S. Padmanabhan, the company’s chief of human resources.
The company, which has had the lowest rate of employee defections among traded Indian tech companies, said its employee attrition rate was 11.5% during the quarter. TCS gave annual raises of as much as 12% to 15% to employees in India in April, after the defection rate rose to 11.3% in the quarter to 31 March.
Ahead of the earnings, which were reported after close of normal trading on the Bombay Stock Exchange, TCS shares fell 0.8% to Rs1,127.9 a share. TCS is the second-worst performer on the benchmark Sensitive Index of the Bombay Stock Exchange in the past three months.
Chitra Somayaji and Anoop Agrawal of Bloomberg contributed to this story.
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First Published: Mon, Jul 16 2007. 11 47 PM IST
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