Also See Losing Edge (Graphic)

It is important to note that a large part of the increase in the operating profit came about due to cost-cutting measures and because of the sharp depreciation in the rupee. Volume growth wasn’t high, as reflected by the 3.2% increase in dollar terms. Needless to say, there are limits on cost cutting, and similar results cannot be expected if volume growth continues to be low.

More importantly, although earnings before interest and tax grew by 34.3% y-o-y, cash flow from operations fell by 2% over the year-ago period. According to the company, debtor days have reduced, so it is not clear why cash flows haven’t grown. But TCS seems to have a chronic problem with cash flows. Its relatively high level of receivables, both in terms of debtors and unbilled revenues, is now a concern in a challenging environment. The company’s provision for bad and doubtful debts jumped from Rs4.5 crore in the June quarter to Rs43.1 crore in the September quarter, owing to write-downs related to two troubled clients in the financial services sector. According to the company, the provision is conservative; in other words, the troubles related to these clients are a thing of the past. Besides, the company management has said that although six of its clients have been affected by the financial crisis, they account for less than 2% of revenues. It remains to be seen if these statements come as a relief to the investing community.

So far, the markets have punished TCS for having among the highest exposure to the troubled sector, and increasing it further by acquiring Citigroup Inc.’s captive BPO business. The company’s shares have fallen by 34% since April, higher than the 28% drop in the CNX IT index. It also trades at only about 10 times trailing earnings, at a significant discount to Infosys Technologies Ltd, reflecting investor perception that it carries higher risk in the current environment.

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