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Business News/ Market / Mark-to-market/  Tata Consultancy Services fails to impress
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Tata Consultancy Services fails to impress

Improvement in margins insufficient to impress investors whose expectations have risen

The company’s volume growth is anaemic at 1.25%, which is quite similar to the 1.5% growth reported by Infosys. Photo: Priyanka Parashar/Mint (Priyanka Parashar/Mint)Premium
The company’s volume growth is anaemic at 1.25%, which is quite similar to the 1.5% growth reported by Infosys. Photo: Priyanka Parashar/Mint
(Priyanka Parashar/Mint)

Shares of Tata Consultancy Services Ltd (TCS) have risen by 6% since Infosys Ltd reported a surprise turnaround on Friday. TCS, the industry leader, announced results for the December quarter after the markets closed on Monday, but it failed to impress. Analysts had expected growth of around 3% in dollar revenue, which the company met by reporting a 3.3% sequential growth to $2.948 billion.

But volume growth was anaemic at 1.25%, which is quite similar to the 1.5% growth reported by Infosys. The TCS management said this is a function of the season weakness of the October-December period, which has a relatively high number of holidays. Additionally, the phenomenon of employees of clients going on furloughs got accentuated and impacted revenue by about 1%, chief financial officer S. Mahalingam said in a post-results phone interview.

Notably, the company’s post-results commentary has turned even more positive, with Mahalingam saying the growth momentum currently is stronger than it was in the previous year. He added that the pricing environment was stable, belying concerns that Infosys had dropped prices to win contracts, forcing competitors to follow suit. While volume growth has been a concern in the December quarter, average price realizations of both TCS and Infosys have come as a positive surprise. TCS chief executive officer N. Chandrasekaran said on a call with analysts that discretionary spending is picking up and clients are displaying increasing clarity on outsourcing budgets. He added that clients are adopting technology to derive cost efficiencies in their operations, apart from pursuing new technologies such as cloud computing to prepare for the future.

Even so, investors will do well to exercise some caution, given the low volume growth last quarter. It will be better to wait and see if growth picks up in the coming quarter.

But the improvement in margins and the better commentary aren’t sufficient to impress investors, whose expectations have risen since Infosys’s results. Given TCS’s past valuations of over 19 times and considering that earnings are currently growing at around 15% without accounting for the fall in the value of the rupee, it is imperative that growth rates pick up in 2013.

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Published: 14 Jan 2013, 08:14 PM IST
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