Mumbai: Tata Consultancy Services Ltd on Friday announced a 19% growth in net profit for the three months to June, beating analysts’ estimates.
This was achieved largely by cutting costs and freezing new hires. Besides, a weaker dollar also drove up the value of its exports to Western economies, where it does most of its business.
Net profits for the quarter at India’s largest software services firm by sales rose to Rs1,534 crore, up from Rs1,290 crore in the same period last year. Its sales climbed 12% to Rs7,207 crore year-on-year.
The earnings figures for the firm beat estimates by both Bloomberg and Reuters financial news services, who had predicted a net profit of Rs1,290 crore (median) and Rs1,273 crore, respectively.
At its annual general meeting in June, TCS chairman Ratan Tata had said: “Our view for the immediate future is slow growth or no growth. The first three months will continue to be flat.”
Last Friday, the firm’s closest rival, Bangalore-based Infosys Technologies Ltd, had also beaten analyst estimates to register a 17% increase in net profit for the first quarter of the current fiscal.
TCS stock rose to a high of Rs444.30 in Friday’s intra-day trading on the Bombay Stock Exchange but closed at Rs433.60, up 3.13% from the previous day’s close, even as Bombay Stock Exchange’s benchmark Sensex index rose 3.47%. The results were declared after markets closed.
“It is not a one-off. We have focused on operational efficiencies and it is showing,” chief executive officer Subramanian Ramadorai said. However, he cautioned that going forward, growth would be tougher.
N. Chandrasekaran, chief operating officer and executive director, who takes over as chief executive in October, said the firm would look to cut selling, general and administrative expenses to 19%. These expenses, which were 21.66% of revenues in the March quarter, declined to 20.7% in the June quarter.
“We need to watch the ground as we expect shocks along the way,” Ramadorai said. “Recovery is not something that’s going to be very soon.”
For the first time, net additions to head count declined. Ajoy Mukherjee, vice-president, global human resources, said: “We will control our recruitments based on needs.”
The banking and financial services and insurance sectors in the US have shown progress but hi-tech, telecom and manufacturing continue to be uncertain, Chandrasekaran said.
A sizeable portion of the company’s revenues come from the US and other Western markets, which are in a deep, and possibly long, recession, and unlikely to hike technology spending soon.
Offshore revenues increased from 47.7% from the last quarter of the year that ended on 31 March, to 50.4% for the quarter ended June, helping the firm shave costs.
Offshore revenue is income generated from performing services in India instead of sending employees onsite overseas. The impact of this move on the firm’s operating margins was 95 basis points, said Chandrasekaran. One basis point is a hundredth of a percentage point.
TCS’ consulting revenues now contribute only 1.4% to revenues vis-a-vis 3.7% for same period last year and application, development and maintenance revenues have gone up by 190 basis points to 48.7%, indicating that the firm has gone back to low-end grunt work.
A 15 June CLSA India report titled Deal Flow Update said TCS would be more aggressive on pricing and the firm’s deal pipeline is flat y-o-y.
“There was pricing pressure,” said Chandrasekaran, adding that pricing dropped as much as 25 basis points this quarter against 497 basis points in the March quarter “Pricing... this year will not go up. We will be happy if we can contain it in the way we want to contain.”
Bloomberg and Reuters contributed to this story.