TCS beats Street, but not by much2 min read . Updated: 14 Jul 2011, 10:50 PM IST
TCS beats Street, but not by much
TCS beats Street, but not by much
The IT (information technology) results season is fairly predictable now. Of late, Infosys Ltd has invariably disappointed the Street, while Tata Consultancy Services Ltd (TCS) has either met or done better than expectations.
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While things aren’t very different this time, TCS’ results weren’t way ahead of Street expectations. Besides, the management’s commentary appears to have turned slightly more cautious than on previous occasions. As such, in this results season, its shares may not outperform peers by much, as they had on previous occasions.
TCS reported a 7.5% rise in revenue in dollar terms compared with the previous quarter, ahead of Street expectations of around 6-7% growth. But note here that the company’s Indian business reported an unusual 12.2% increase in revenue. The international business, which is what most analysts watch out for, reported growth of around 6.9%, which is more or less in line with what some analysts had estimated. Of course, the reported growth is much ahead of Infosys’ growth of 4.3%. But then, this disparity in growth had already been priced in.
Margins dropped by 214 basis points, which is slightly higher than estimates of some analysts. But then, the difference isn’t much and a relatively high drop in margins was expected because of the wage hikes in April. Coupled with the slight appreciation in the rupee versus the dollar, this led to a 1.7% sequential drop in operating profit in rupee terms. One basis point is one-hundredth of a percentage point.
Again, while this is much better than the 7.1% drop in profit reported by Infosys, this difference was more or less on expected lines. Even so, it is worthwhile to note that TCS’ operating margin, at 26.17% last quarter, was ahead of Infosys’ margin of 26.07% for the first time. This further supports the view that Infosys no longer deserves to trade at a premium. Of course, this is already reflected in the valuations of the two firms.
Yet, while TCS’ results were much better than those of Infosys, there are some areas of concern. The firm is operating at an unusually high employee utilization rate of around 83%, which, according to some analysts, could cause difficulty in taking advantage of growth opportunities. Additionally, the company increased its headcount only by 1.5% last quarter.
With utilization rates being high already, one wonders if the company can deliver high growth in the September quarter, which has traditionally been the strongest for the sector. And while TCS has dismissed this as a quarterly aberration, it’s worth noting that new client additions fell to 24 last quarter from 39 in the March quarter.
Interestingly enough, words such as cautious, watchful and uncertainty found its way into TCS’ post-results commentary, unlike previous quarters, when the company was almost dismissive about macroeconomic concerns affecting its growth. And while it had been talking of the potential for pricing increases owing to the strong demand environment about three months ago, it is now saying that the trends in pricing are neither negative nor positive. It added for good measure that the uncertainty in the macro economy hasn’t affected demand yet.
Even so, the company’s slightly cautious tone could dampen the spirits of analysts who are particularly gung-ho about TCS’ prospects.
Graphic by Yogesh Kumar / Mint
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