Mumbai: Tata Consultancy Services Ltd (TCS), India’s largest software services exporter by revenue, beat Street expectations on Thursday to post a 3% sequential rise in net profit for the fiscal fourth quarter (Q4), even as its management sounded optimistic on deal flow, announcing double-digit wage raises for the first time in three years.
TCS reported a 3.1% sequential rise in net profit for Q4 at Rs2,402 crore and a 5.1% increase in revenue to Rs10,157 crore, according to US accounting norms.
For the full year ended 31 March, net profit rose 26% year-on-year to Rs8,683 crore while revenue gained 24.3% to Rs37,325 crore.
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The software exporter’s shares still took a beating after quarterly profit margins fell 47 basis points (bps) quarter-on-quarter, dragged down by currency fluctuations and higher taxes due to the withdrawal of exemptions on some centres by the government. One basis point is one-hundredth of a percentage point.
TCS’ earnings performance comes at a time when rival and technology bellwether Infosys Technologies Ltd last week disappointed investors with lower-than-expected Q4 earnings and gave a muted forecast for earnings per share for the current fiscal year that began on 1 April, prompting downgrades and cuts in its target price by many brokerages.
Beating expectations: TCS chief executive N. Chandrasekaran. Abhijit Bhatlekar/Mint
The latest earnings confirm TCS’ emergence as bellwether for the information technology (IT) industry, a mantle it has taken away from Infosys. Still, maintaining the role will take some doing.
“TCS has outperformed Infosys in terms of revenue growth over the past few quarters,” said Dipen Shah, senior vice-president (private client group research) for Kotak Securities Ltd. “It will have to work harder for sustaining the high level of margins, going forward.”
Infosys’ Q4 net profit rose 2.1% to Rs1,818 crore while revenue grew 2% to Rs7,250 crore. Its earnings per share forecast for the current fiscal year was significantly below market expectations—between Rs126.05 and Rs128.21 versus Rs138.
TCS doesn’t give forward guidance on likely earnings.
“TCS is a better bet than Infosys and Wipro in the near term because of their geographical and product diversification and management bandwidth,” said Srivathsan Ramachandran, an IT analyst with Spark Capital.
Wipro Ltd is scheduled to announce earnings on 27 April.
“We’re looking forward to an excellent year ahead,” N. Chandrasekaran, chief executive officer and managing director of TCS, said at the earnings press conference in Mumbai on Thursday. “The deal pipeline looks healthy and we have a very sound platform which is robust. We’re looking at a strong demand environment and preparing for that. We expect to grow.”
Chandrasekaran said revenue growth came from across geographies and business verticals, including banking, financial services and insurance, retail, life sciences, high technology, energy and utilities.
“From a services perspective, in this quarter we have seen a significant uptick in enterprise solutions, clearly marking the return of discretionary spends,” he said. “We’re seeing the (unleashing of) power of the nimble organization we put in place a couple of years ago.”
The US technology market will expand 8% to $805 billion (Rs35.66 trillion) in 2011, up from 7.4% projected earlier, with software, IT consulting services and technology outsourcing growing faster than last year, research firm Forrester Research Inc. said earlier this month.
TCS derives over 80% of its revenue from the US and Europe.
The “results are solid across most parameters”, said Nimish Joshi of CLSA Asia-Pacific Markets. “The most important investment indicator is the hiring pattern and these indicators are positive. Third consecutive quarter of gross hiring of over 19,000 people (over 8,569 lateral hires) in the quarter (after hiring 20,219 people in the previous quarter) indicates that TCS is preparing for a big year ahead in 2011 and further validates the strength of the demand recovery.”
TCS also said that it plans to raise wages of its staff in India by 12-14% in the current fiscal. Overseas staff in mature markets will get increases of 2-4% and those in emerging markets 2-10%.
The firm, however, flagged wage hikes and currency fluctuations as the headwinds for margins going forward.
Changes in the local currency against the dollar and the euro resulted in net profit margins shrinking 47 bps quarter-on-quarter (and by 153 bps year-on-year) to 23.7%, according to US accounting standards.
Operating margins fell 6 bps quarter-on-quarter, but rose 51 bps year-on-year to 28%.
The rupee appreciated 0.27% in the January-March period against the dollar.
The firm’s effective tax rate for the last fiscal was in the region of 17-18%, but will increase to 23-24% in the current fiscal as several centres that enjoyed tax breaks under the Software Technology Parks of India Act will no longer do so after the withdrawal of some of these by the government.
TCS closed 2.2% lower at Rs1,191.65 on the Bombay Stock Exchange, underperforming the 0.7% rise in the benchmark 30-stock Sensex. The stock has, however, risen 6.5% over the past couple of days and was up 2% before the earnings were announced.
“People were expecting more since the company has been beating forecasts by a huge margin for the last couple of quarters,” said Ramachandran of Spark Capital.
Neha Singh and Sumeet Chatterjee of Reuters contributed to this story.
Graphic by Ahmed Raza Khan/Mint