Tata Consultancy Services Ltd (TCS), India’s largest software services company, has reported a Rs1,195 crore net profit in the last quarter of 2006-07, nearly 44% more than its earnings in the same quarter of the previous financial year, bucking the effects of a strengthening rupee and increasing wages.
At Rs5,162 crore, revenues for the quarter grew 38.5% in 2006-07 over the same period a year ago.
Services, such as back-office support, assurance, infrastructure and consulting, grew to 18% of TCS’ 2006-07 revenues, up from 10% in 2005-06. “Our emerging high-growth services are giving the company a superior quality of revenue and a diversified customer base across markets and verticals,” said S. Ramadorai, chief executive officer and managing director.
TCS reported nearly Rs4,213 crore in net profit for the year, a 42% growth from 2005-06. The company’s annual revenue registered a 41% year-on-year growth, at Rs18,685 crore.
While analysts expressed relief at TCS’ 8% sequential growth, in the fourth quarter over the third, a slower growth in its revenue from banking, financial services and insurance or BFSI clients is a cause of concern for some.
“TCS has traditionally been growing its revenues from BFSI, therefore this quarter’s slower growth may cause jitters,” said an analyst at the Mumbai offices of an MNC brokerage, who requested anonymity as his firm does not allow media interviews.
However, continued strong demand overrode concerns of a rupee that strengthened 1.8% in the January-March quarter. “In an uncertain environment, wherein we have seen companies getting hit because of an appreciating rupee against the US dollar, an 8% growth in net profits is pretty good,” said Harmendra Gandhi, analyst with Mumbai-based Brics Securities.
Like Infosys Technologies Ltd, TCS results defied any impact of a feared slowdown in tech spending by clients in the US, the biggest market for Indian software services firms. The US accounts for about four-fifths of India’s estimated $48 billion (Rs2.02 lakh crore) software and business process outsourcing services exports.
“We do not see any slowdown and our large customers continue to ramp up (outsourcing),” Ramadorai said on an analyst call late evening.
Infosys, India’s No. 2 tech vendor, on Friday reported a 70% growth in its profits for the fourth quarter of fiscal 2007, to Rs1,144 crore, aided by a reversal of Rs125 crore in taxes. For the year to March, Infosys’ revenue grew 45.9% to Rs13,893 crore and its profit, 56.6% to Rs3,850 crore.
Worried over a stronger rupee, TCS has taken $1 billion worth of contracts on the US dollar and other currencies in 2007-08.
“The volatile rupee in the fourth quarter had a 1.87% negative impact on the revenue for the quarter and it impacted the net profit by 0.57%,” said S. Mahalingam, chief financial officer of the company.
The company has increased billing rates for its services, shifting more work offshore to less expensive destinations such as India, and controlling costs.
“The pricing growth in the quarter helped in 89 basis point growth in Ebitda (earnings before interest, tax, depreciation and amortization) for the quarter,” Mahalingam said. “We are exercising several levers in term of pricing, offshore leverage and cost controls to strengthen profit margins,” he said.
Rising wages—salaries account for about half the expenses at tech service companies—is another area of concern for TCS as this can erode the competitiveness of the company with respect to US rivals such as IBM and Accenture. “We are increasing the wages of our non-India employees by 3% to 5%; the wage increase for Indian employees would be in the range of 12-15%. For fresh recruitments, we are having a 15% increase,” said S. Padmanabhan, executive vice-president (global human resource), TCS.
“Last year, we had 2.33% dent on operating margin due to the wage increase, this year also we are looking at a similar impact on the margin,” said Mahalingam
TCS, which does not set out revenue expectations for the year ahead, said it expects growth in demand for its services to be strong in 2007-08. The company is in talks with at least 10 global corporations on deals worth more than $50 million each. “Some of these deals could be in the range of over $100 million,” said Phiroz Vandrevala, the company’s executive vice-president.
TCS shares rose Rs17.45 or 1.38% to Rs1,280.10 in a market that grew 2.33%.
The strong growth in business at TCS and Infosys has set the expectations for other results this week. HCL Technologies Ltd reports earnings on Tuesday; Wipro Ltd, India’s third-biggest tech services vendor, and Satyam Computer Services Ltd, on Friday.
Powering Ahead (Graphic)