Saturday, January 16, 2010

TCS Performs Well, 34% Rise In Q3

. Saturday, January 16, 2010

By stockOzone team

India’s biggest software exporter, Tata Consultancy Services (TCS), on Friday reported better-than-expected earnings and joined rival Infosys in signalling that the worst may be over for the country’s $60-billion IT and back-office services industry.

The company’s net profit rose 34% to Rs 1,824 crore during the third quarter ended December 2009 while revenues rose 5.1% over the year-ago period to Rs 7,649 crore. TCS CEO N Chandrasekaran said the growth was holistic, coming from across the sectors of banking and financial services, energy and utilities. Shares of TCS closed at Rs 791.80, its all-time high, on BSE on Friday, ahead of the company’s third-quarter earnings announcement.

“The highlight is that (in constant currency terms) we had all our geographies and all our industries delivering growth. It’s not a one-off, but holistic performance,” said Mr Chandrasekaran. Importantly, like Infosys, the company signalled a positive outlook for the future while terming the quarter’s performance as spectacular. Earlier this week, rival Infosys revised its business outlook for the year ending March 2010, and said revenues for the year will rise as much as 3.8% to Rs 22,519 crore, up from around 1.7% growth predicted at the end of the second quarter ended September 2009.

TCS, which counts Citigroup, JPMorgan and UK’s Cardiff Council among its top customers, said financial services clients led the rally in volume of business with a 7.3% growth. However, it said all sectors, including the troubled manufacturing and telecom, are seeing a recovery. “Though we cannot expect huge volumes in these sectors, growth is happening and we see recovery happening,” Mr Chandrasekaran added.

The company closed 10 large deals and is pursuing at least 20 large outsourcing contracts in the current quarter. TCS added 32 new customers during the quarter.

“Both TCS and Infosys have performed much better than expectations. Both have also had lower provisioning for doubtful debts, which has boosted margins. In the case of Infosys, however, the margin improvement is much sharper,” said an analyst with a domestic brokerage.

“The technology downturn of 2008 and 2009 is unofficially over,” said Andrew Bartels, Forrester Research vice-president and principal analyst. “All the pieces are in place for a 2010 tech spending rebound. In the US, the tech recovery will be much stronger than the overall economic recovery, with technology spending growing at more than twice the rate of gross domestic product (GDP) this year,” he added.

According to Forrester, after declining 8.2% in 2009, US IT spending will grow 6.6% in 2010 to $568 billion. “Some of our customers have finalised budgets, some are still closing them. But there is going to be a variation — for some clients, it is going to stay flat and for some a slight increase. In either case, the important thing is that they are trying to offshore more,” said Mr Chandrasekaran. He also projected that billing rates would remain flat, going forward.

“TCS results were above estimates. The 6.5% volume growth was a positive surprise. Even the margin improvement at the operating level was more than expected. A broad-based growth is also a positive with the large demand constituents of BFSI and the US growing well in the quarter,” added Dipen Shah, analyst with Kotak Securities.

The company, which made 24,885 offers on campus last year, will ask 8,500 of them to join in the January 2010 quarter. With this, it expects to have honoured all the offers it has made. “We expect that only 17,000 will join — 9,200 have already joined us in the December quarter,” said Ajoy Mukherjee, global head of HR. There will also be no salary increments this fiscal although it has announced a 50% variable pay. The freeze in wage hikes may be reviewed in April.

Disclosure: Author does not own any of the stocks discussed here.

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