TCS beats forecast, warns of economic uncertainties

TCS beats forecast, warns of economic uncertainties

Mumbai: Tata Consultancy Services Ltd (TCS), India’s largest software services exporter by revenue, beat Street expectations on Thursday, with its fiscal first quarter (Q1) net profit remaining flat sequentially, while warning that global economic uncertainties continued to cast a shadow on the demand environment.

Also Read | TCS beats Street, but not by much

TCS reported a 0.02% sequential fall in net profit for Q1 at 2,380.32 crore and a 6.3% rise in revenue to 10,797.02 crore, according to international financial reporting standards that it has moved to for the first time.

The software exporter’s shares on Thursday fell 2.2% to 1,125.25, underperforming the Bombay Stock Exchange’s 10-stock IT Index’s 1.5% fall and the broader benchmark Sensex’s 0.1% gain. The earnings numbers were declared after the close of trading.

The IT bellwether’s warning on the global economic uncertainty mirrors similar sentiments echoed by Bangalore-based rival Infosys Ltd, which said that while clients weren’t cutting technology budgets nor asking for steep cuts in price, they remained uncertain when it came to actually spending money, resulting in delays in decision making.

Infosys has posted a sequential increase in revenue, but a drop in net profit in the June quarter.

“Though we continue to see steady demand flow for our services, the uncertain global macroeconomic environment demands that we adopt an entrepreneurial approach and remain agile to capture growth opportunities as they emerge," TCS chief executive officer and managing director N. Chandrasekaran said.

He said that businesses around the world realize that the economic uncertainty is going to prevail for sometime, but have worked out plans to continue focusing on growth and efficiencies. “We have got to be very flexible and adapt to changes in opportunities. We have to be nimble to react," he said in an earnings briefing.

“The first quarter performance is robust and should help keep the stock strong in the near term. That said, we remain worried by elevated expectations that the Street has from TCS and the first-quarter results will only set the bar higher," Nimish Joshi, an analyst with CLSA Asia-Pacific Markets, said in a post-earnings note.

“With outlook becoming riskier (in view of the weaker macro), we see multiple pressure points for the sector. We see potential downsides to FY13 earnings across the sector. In an earnings downgrade cycle, the seamless rollover of earnings, which a large section of the Street is hoping for, is unlikely to come through," the note added.

The brokerage said that it was maintaining its underweight rating on the sector.

TCS said growth in Q1 was broad-based, with the retail, telecom, high-technology, travel and hospitality verticals growing in double digits while banks and financial services, and manufacturing grew in high single digits.

The Middle East, India and Africa outperformed mature markets such as the US and Europe, but Asia-Pacific remained muted while Latin America actually registered a decline in growth.

TCS added 24 new clients during the quarter while the number of clients in the category of $50 million (Rs 220 crore) or above increased to 33 from 27.

Discretionary spending, which took a back seat over the past few quarters, is now returning, especially with existing clients migrating to larger deals, which is an encouraging trend, Chandrasekaran said. “The deal pipeline is pretty strong and well spread out," he said.

The?company’s operating margins fell 214 basis points to 26.2% from 28.3% sequentially, because of annual wage increases of 12-14% in Q1. One basis point is one-hundredth of a percentage point.

“The major headwind of wage hikes is behind us, but some is still left in the form of promotions, but that is already factored in," Chandrasekaran said.

Chief financial officer S. Mahalingam said the company was confident of maintaining operating margins at around 27% for the fiscal.

TCS added 11,988 employees at the gross level and 3,576 employees on a net basis during the quarter, which consequently pushed up the attrition rate to 14.8% for Q1 from 14.4% in the previous reporting period. “Attrition tends to go up in the first quarter due to seasonal factors. Some staff quit to pursue higher studies at this time of the year while some who are unsatisfied with annual pay hikes also leave," said Ajoyendra Mukherjee, head of human resources.