Tata Consultancy Services Ltd’s (TCS) results for the quarter ended December are a mixed bag. Considering the company’s high exposure to the beleaguered financial sector, it did well to grow business volumes by 2.4% and maintain pricing in constant currency terms on a quarter-on-quarter basis. The company reported a growth of 1.2% in constant currency terms, in line with the growth reported by Infosys Technologies Ltd earlier this week.
Another positive is that it improved on its debt collection and debtor days fell by about 10 days. Considering the weak environment most of the company’s clients are operating in, this is commendable. Also, thankfully, it didn’t have to provide high amounts for bad and doubtful debts like it had to in the September quarter. What’s more, it has tightly managed selling, general and administrative expenses and has eked out a 53 basis points improvement in margin at the operating level. One basis point is a hundredth of a percentage point.
Now for the negatives. There aren’t many details available on the company’s year-on-year (y-o-y) performance, but from whatever the company has reported, the performance looks mediocre. Reported revenues in dollar terms are flat at last year’s level. Growth in constant currency numbers isn’t available for TCS, but for perspective, Infosys technologies Ltd’s reported revenues were 8% higher on a y-o-y basis. Growth in dollar terms are a proxy for volume growth and the company seems to be lagging on this front on a y-o-y basis.
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TCS has done well in terms of operating margin, but all of these are lost on account of losses on its forex hedges. So although earnings before interest and tax rose by 5.7% on a y-o-y basis to $367 million (Rs1801.97 crore), the net profit of $280 million was nearly 18% lower than the year-ago level. Infosys, on the other hand, has been less aggressive with hedges and has reported a 6.5% growth in net profit on a year-on-year basis.
One issue a few investors have always raised about the company is its ability to generate cash flow. In the quarter ended December, free cash flow stood at $279 million, 4.5% lower than the year-ago period. It’s interesting that cash flow has fallen despite improvement in debtor days. These issues offset the decent growth the company has reported quarter-on-quarter.
As far as the stock’s performance goes, it has lagged Infosys in the past three months or so, partly from concerns about TCS’ high exposure to the financial sector. The results somewhat bear out the fallout of this, at least in terms of y-o-y growth.
Graphics by Ahmed Raza Khan / Mint