At the press conference to announce its results, Tata Consultancy Services Ltd (TCS) avoided talking about its financial performance in the March quarter and focused on the performance for the full year instead. The company even declined to comment on how much its acquisition of Citigroup Global Services Ltd (CGSL) contributed to growth in the March quarter, giving the impression that the fourth quarter must have been exceptionally bad.
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Based on the company’s disclosures about the size and profitability of the Citi business process outsourcing business at the time of the acquisition, it turns out that the newly acquired business would have added about 5% to revenue and 4% to operating profit last quarter. Stripped of this, revenue fell by 6.4% in rupee terms and 8.2% in dollar terms compared with the December quarter. Rival Infosys Technologies Ltd reported a 3.2% drop in revenue in rupee terms and a 4.3% drop in dollar terms. Given TCS’ higher exposure to the banking and financial services sector, the markets had factored in a weaker performance, but the drop in revenue is a tad disappointing.
TCS did well on the profitability front, though, reporting a drop of around 9.5%, in line with what Infosys reported. (This is assuming that CGSL has an operating margin of 20%.) Its margins fell by only about 90 basis points quarter-on-quarter, compared with a drop of at least 200 basis points in the case of Infosys. One basis point is one-hundredth of a percentage point.
TCS cut down on employee additions and travel expenses to contain costs. The company has also improved its cash generation, with free cash flow increasing by an impressive 43% for the year. As a percentage of sales, free cash flow rose to 14.5%, compared with 12.4% in the preceding year. Infosys’s free cash flow amounted to at least 18% of sales last year. It’s heartening to see big Indian information technology companies improve on cash generation in tough times.
The company’s full-year results are a testimony to the fact that it’s facing greater pressure than some of its peers owing to its high exposure to the financial services sector. For instance, the company’s organic revenue and profit grew by 5.5% and 10.6%, respectively, in dollar terms last year.
Infosys’ revenue and profit grew by a much higher 11.7% and 18.6%, respectively. Moreover, because of aggressive forex hedges, profit before tax fell year-on-year in dollar terms, while Infosys managed a double-digit rise in profits. Analysts expect this underperformance to continue this fiscal year too, at least on the revenue growth front because of the client profile.
But this seems to be factored in the valuation discount of TCS shares. The company’s discount has been widening for some time and this trend has accelerated since the current results season has begun.
Graphics by Sandeep Bhatnagar / Mint
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