TCS results may be key to impact of US slowdown on sector

TCS results may be key to impact of US slowdown on sector

If analyst estimates hold out, the results of Tata Consultancy Services Ltd (TCS), due on Wednesday, could provide interesting reading for anyone looking for clues on the near-term future of Indian IT (information technology) firms.

IT analysts will watch the results of firms such as TCS and of US technology and finance companies to get a sense of the impact a possible recession in the US, the largest market for IT services. TCS is the largest Indian software services firm, and analysts expect its revenue growth for the quarter to outpace that of rival Infosys Technologies Ltd, an indication that there is still significant business to be had. And they also expect its net profit to rise at almost the same rate as Infosys’—after factoring out an one-off gain for the latter.

According to average estimates of six analysts Mint spoke to, TCS will likely announce an increase of 22.6% in revenue, compared with a year ago, taking the number to Rs5,960 crore. And it could announce a 20.29% increase in net to Rs1,328 crore.

Last week, Infosys declared a revenue growth of almost 17% for the December quarter to Rs4,271 crore, and a 25.2% growth in net profit to Rs1,231 crore. However, the profit includes a reversal of tax provisions worth Rs50 crore. Excluding that, the company’s net would have increased 20%.

The analysts predict that TCS will also show a 17.2% increase in operating profit to Rs1,611 crore. “For TCS, the driver would be good volume growth," said Pankaj Kapoor, an analyst with Mumbai-based brokerage, ABN Amro Asia Equities (I) Ltd.

“TCS has been maintaining 8% sequential growth for (the) last many quarters," said Harit P. Shah, analyst, Angel Broking Ltd, a domestic brokerage. “The company should be able to continue with that because of the visibility of revenue from large deals won recently."

In 2007, TCS won five big-ticket multi-year outsourcing deals: a $1.2 billion outsourcing contract from information and audience measurement firm Nielsen Co.; a $140 million deal with Ecuador’s Banco Pichincha; a $140 million deal with state-run telephone company Bharat Sanchar Nigam Ltd; and another $200 million deal with Mexican Social Security Institute. It has also struck another large deal with Bank of China but did not disclose the deal size. The impact of these deals on the three months to December isn’t known.

The company also has a higher number of fixed-price contracts than its peers. The contracts allow companies the flexibility to automate processes and use fewer workers for more profit margins. IT companies typically sign time and material contracts in which billing is based on the number of employees on a project and the time they spend on it.

Harsad Deshpande, analyst with Religare Securities Ltd said the higher number of such contracts “would not be enough to move the stock."

According to him, around 57% of TCS’ revenue comes from fixed price projects while for Infosys these projects contribute only 32% .

On Monday, TCS shares on the Bombay Stock Exchange dropped 2.86% to Rs968.80 on a day the Sensex lost 0.48% to close at 20,728.05 points.