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TCS is expected to record sequential revenue growth of 4.4% for the three month period ending June, although EBIT margin could slip by 137 basis points to 25.8%, hurt by the wage hike made by the company, according to analysts at DSP Merrill Lynch. Photo: Mint
TCS is expected to record sequential revenue growth of 4.4% for the three month period ending June, although EBIT margin could slip by 137 basis points to 25.8%, hurt by the wage hike made by the company, according to analysts at DSP Merrill Lynch. Photo: Mint

TCS results: 5 things to watch out for

Analysts expect the firm's revenue to rise at least 4% in the quarter, helped by healthy deal wins and favourable currency swings

Mumbai: Tata Consultancy Services Ltd (TCS) will report its fiscal first-quarter results on 9 July, becoming the first among the Big Four in India’s $146 billion outsourcing sector to reveal how it fared in the April-June period. Analysts expect the industry leader’s revenue to rise at least 4% in the quarter, helped by healthy deal wins and favourable currency swings. Mint highlights five points to watch out for in TCS’s numbers.

1. Was TCS able to win more business from existing clients?

The company is expected to record sequential revenue growth of 4.4% for the three-month period ending June, although earnings before interest and tax (Ebit) margin could slip by 137 basis points to 25.8%, hurt by the wage hike given by the company, according to analysts at DSP Merrill Lynch. One basis point is one-hundredth of a percentage point. However, industry analysts will evaluate TCS’s growth on its ability to generate more business from existing clients. Its record in getting new clients over the last few years has been impressive. At the end of March this year, TCS had 29 clients, each bringing in more than $100 million in revenue against 17 at the end of March 2013.

However, the company posted almost no revenue growth in both the third and fourth quarters, hurt by currency fluctuations and its inability to cross-sell more services to existing clients.

2. Is there any improvement in the insurance, telecom and energy sectors?

A big wrinkle in the TCS growth story over the last year has been its underperformance in the insurance, telecom and energy sectors. Falling crude prices have made most global oil giants put their expansion plans on ice and the global telecom sector has been disrupted by Skype and other nimble rivals, in turn leading to less business for software vendors from both these areas. However, weakness in the insurance segment is more of a TCS-specific issue and caused by client problems it faces at its UK-based unit Diligenta. Analysts expect some improvement in the retail and insurance segments but see Diligenta facing headwinds until the end of the calendar year. Infrastructure services should report good growth, thanks to business from Japan. Its performance in the US and Europe will also be closely watched as these markets account for 85% of its revenue.

3. Can Ignio be a game-changer?

Indian software vendors seem to be adopting a platform-centric strategy to drive growth. Earlier this year, Wipro Ltd unveiled an artificial intelligence platform, Holmes, while Infosys Ltd launched an automation platform called the Infosys Information Platform. Last month, TCS launched Ignio, which it will sell as a standalone product and also with its service offerings. Although these platforms may not be blockbuster products like SAP’s data analytics platform HANA, software exporters believe these platforms will help homegrown software exporters make their service offering stand out when bidding for large outsourcing contracts. Details about Ignio, including pricing and other platforms currently in the works at TCS will be closely watched.

4. In SMAC we trust?

During the fourth quarter, the company said revenue from its cloud platform amounted to $125 million. That is not a big number for TCS, which generates over $15.5 billion in yearly revenue. But as information technology (IT) vendors work more towards moving existing applications to the cloud, helping clients build a more socially enabled model, and finding more business in helping clients make sense of unstructured data sets, contribution from digital technologies will only head north. TCS’s rival Accenture Plc. generates over 20% of its $30 billion in annual revenue from helping clients embrace the new digital era. Also, Accenture’s digital business has grown at a faster clip than its traditional outsourcing business. It remains to be seen if the management at TCS believes revenue from social, mobility, analytics and cloud (SMAC) technologies are big enough to be spelt out. But clearly, the road ahead for Indian IT outsourcers is digital. Even TCS seems to acknowledge this—the cover page of its annual report is titled Default is Digital.

5. Will TCS’s attrition rate rise?

TCS has hired fewer people in the third and fourth quarters of fiscal year 2014-15. Hiring is one of the better parameters to evaluate a company’s growth as it reflects the new deals it generates. Any uptick in employee hiring will assuage investor concerns and will mean the underperformance over the last six months was more of a blip. Although the first three months of a fiscal year see a lot of engineers leave the company, attrition rate will be another metric that will be eyed by investors. At 13.8%, the attrition rate for TCS’s IT services is the lowest among top IT firms. However, more employees left the company in the third and fourth quarters than in the past. An unusual spike in attrition rate will be another reason to worry for TCS.

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