TCS stuns Street, sees better times ahead

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TCS CEO and managing director Natarajan Chandrasekaran during the announcement of company's Q2 results in Mumbai. (PTI) TCS CEO and managing director Natarajan Chandrasekaran during the announcement of company's Q2 results in Mumbai. (PTI)
SummaryTCS Q2 revenues rise 16.6% q-o-q, net jumps 23.8% to Rs 4,702 crore.

Buoyed by its strongest volumes in nine quarters and a weak rupee, Tata Consultancy Services (TCS) sailed past Street expectations on Tuesday, posting an after tax profit of Rs 4,702 crore for the three months to September, a sequential jump of 24%.

The software services exporter’s revenues soared 16.6 % quarter-on-quarter to R20,977 crore, driven by higher volumes of 7.3%, although realisations dropped 94 basis points (bps). Dollar revenues came in at a strong $3.34 billion, up 5.4% q-o-q. Operating profit margins rose 320 bps sequentially to a robust 30.2%.

TCS CEO and managing director Natarajan Chandrasekaran was confident the demand environment remained strong, pointing out that discretionary spends had risen in the last two quarters, and was expected to increase. “We are not overly concerned and continue to partner companies that are reinventing themselves and positioning themselves for the future,” the CEO observed.

Chandrasekaran added he had not heard anything negative yet on IT budgets of companies for 2014. “I have not had a negative conversation yet,” he asserted adding the firm had yet to see any impact of the US shutdown. TCS added three $100 million-plus clients in Q2FY14 taking the total number of large clients to 22. “Demand has been excellent and we may increase the hiring numbers,” the CEO said.

Chief financial officer Rajesh Gopinathan observed that pricing remained stable, helping the company protect its profitability. The weak rupee, he explained, had boosted margins by 300 bps while improved operational efficiencies had added 12 bps.

“Going forward, we see sustainable margins of between 26% and 28%,” Gopinathan said, warning, however, that furloughs by clients may impact margins in Q3FY14.

The company's exposure to foreign currency has also been taken care of, the CFO said, with TCS fully hedged for the third quarter, and “slightly” for the fourth quarter as well. “Our hedging policy remains focused on the medium and short term,” he said.

The latest reported quarter's results included revenue from its Alti acquisition, with 1.2% of overall volume growth in the second quarter coming directly from the newly acquired business, the CFO confirmed.

TCS continued to ramp up hiring in the second quarter, with a total gross addition of 17,362 people (net addition of 7,664 employees), taking its workforce to 285,250 on a consolidated basis. The company is likely to cross three lakh employees by the end of the current fiscal.

TCS scaled new peaks in anticipation of stellar results on the BSE on Tuesday, with its scrip touching an all-time high of 2,258.09, before shedding some of its gains to close up marginally at Rs 2,218.05.

The company said it witnessed growth across all its core markets, with Europe, North America and UK leading the pack. Acquisitions have been another driver of growth for TCS, which earlier this year bought French technology services company Alti for around Rs 530 crore to give it an edge in the crucial European market.

TCS' growth has been outstripping its peers amid an increase in global spending on IT services; TCS has extended its lead on India's No. 2 software services exporter Infosys, which last week reported a lower-than-expected net profit for the three months to September 30 of Rs 2,407 crore against 2,369 crore in the same period a year earlier, hurt by a one-off provision to seek a 'civil resolution' to an investigation in the United States over the use of temporary employment visas.

Utilisation including trainees – a key indicator of billing efficiency was at 75% – while the attrition rate (LTM) remained stable at 10.9%, including business process outsourcing (BPO). The attrition rate in IT was at 9.9% while BPO attrition was higher at 16.3%.

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