Tata Consultancy net profit up 34% on rising IT spends

`We have seen growth in all verticals,' says CEO N. Chandrasekaran.

Mr N. Chandrasekaran, CEO and Managing Director, Tata Consultancy Services, flanked by Mr Ajoyendra Mukherjee, Head, Global HR (left), and Mr S. Mahalingam, CFO, announcing the company's results in Mumbai on Friday. - Shashi Ashiwal

Our Bureau

Mumbai, Jan. 15

Riding on the back of a revival in IT spend across industries and geographies, the country's largest software exporter, Tata Consultancy Services, beat market expectations to report a 34 per cent rise in net profit for the third quarter ended December 31, 2009.

The Mumbai-based company - which counts bellwether firms' such as Citibank, Chrysler and GE as clients - recorded a net profit of Rs 1,824 crore against Rs 1,362 crore reported in the year-ago period.

Revenues went up by 5.1 per cent to Rs 7,648 crore (Rs 7,277 crore).

"We have seen growth in all verticals, including the troubled ones such as hi-tech and telecom. Geography-wise, we see a broader recovery not only in the US, but also in Europe, Asia-Pacific and India," Mr N. Chandrasekaran, Chief Executive Officer and Managing Director, told newspersons here on Friday.

He said the demand sentiments are improving every quarter. "We are seeing deal closures happening at the same pace that we used to before the financial crisis. Even discretionary spending (IT spends on new projects) is coming back as seen by the improvement in our consulting business," said Mr Chandrasekaran. (As a percentage of overall revenues, consulting now contributes 2.1 per cent to overall revenues as against 1.6 per cent in the previous quarter.)

Through improved operational performance and cost-cutting measures, TCS was able to expand its operating profit margin for the quarter by 176 basis points. Volumes grew 6.6 per cent, the highest in the last eight quarters. In the quarter, TCS added 32 new customers for its IT and back-office outsourcing services.

TCS' domestic business, which accounts for 8.5 per cent of its revenues, grew sequentially 8 per cent. The growth has come from sectors such as government, financial services and others.

"Volatility in domestic revenues continues to be a challenge for the company. Though we are not yet at a point where we can claim to have got the business mix right, we are still seeing growth," Mr Chandrasekaran said, adding that the domestic unit's profitability has also gone up sequentially.

n deals totalling over Rs 450 crore, TCS has been selected by two States as partner for the Accelerated Power Development and Reform Programme, said a press statement.

The energy and utilities domain, as a percentage of overall company revenues, now account for 3.4 per cent as against 2.8 per cent in the second quarter.

On the forex front, the company was able to pare hedging losses to Rs 35 crore as against Rs 113 crore reported in the previous sequential quarter. For the fourth quarter, TCS has $400 million of hedges at an average rate of Rs 45.7 to the dollar, according to Mr S. Mahalingam, Chief Financial Officer and Executive Director.

In US dollar terms, cross currency movements had a positive impact of 90 basis points on the company's operating margins, Mr Mahalingam told analysts in a conference call. On being asked about which way he expects the rupee to move, Mr Mahalingam told reporters: "We are preparing for further appreciation in the rupee and are positioning ourselves accordingly."

Given the increased buoyancy in the business environment, will TCS add to its business development and sales teams?

"We have been working towards bringing down our sales and general administration costs.our endeavour is to generate more revenues from the current sales teams," Mr Mahalingam said.

TCS has announced a quarterly dividend of Rs 2 a share. Ahead of the results announcement, TCS stock hit its 52-week high of Rs 799.2, before settling at Rs 791.80 (9.6 per cent higher than the previous day's close) on the Bombay Stock Exchange.

Protecting margins a big worry for IT firms

BANGALORE: India's leading software services companies are set to report a fall in profit margins for the last quarter due to a firmer local, though demand for outsourcing is improving in a global economy on the mend. The country's $60 billion sector, which manages complex computer networks to maintaining technology operations for clients such as General Electric and Citigroup, is back to its hiring ways and is also boosting salaries. "All the negatives in the world economy are not out of the system, but the confidence level in the IT sector is better now compared to the beginning of last year," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services. "The companies are now expected to come back on the growth path, but the key challenge is the currency rate."

A global recovery, recent deal wins and stable prices have brightened the outlook for Tata Consultancy Services and Infosys Technologies, India's top two IT exporters, after the global recession hit the sector last year. The rupee, which rallied to a 15-month high on Thursday, surging wages, and intense competition from global firms such as IBM, Accenture and Hewlett-Packard are seen as key risks for the sector. The rupee is set to rise another 4 percent this year on top of its 4.7 percent increase last year, with gains driven mainly by inbound portfolio investment, according to a Reuters poll. Indian tech firms are a magnet for thousands of young jobseekers with their sprawling campuses offering pizza and Subway outlets, golf courses and fitness centres to retain employees.

The software services sector gets more than half its revenue from the United States but companies are furiously expanding in Asia Pacific, Latin America and the Middle East to reduce dependency in the market and boost growth. Infosys, India's No. 2 software exporter, a trendsetter in the showpiece industry, kicks off the earnings parade on Tuesday, followed by sector leader Tata Consultancy on Friday and third-ranked Wipro on Jan 20. Infosys is expected to post its first year-on-year drop in October-December profit, as wage rises, a stronger rupee and higher sales and marketing costs dent margins. Valued at $32 billion, Infosys, which had previously frozen salary hikes and promotions for this fiscal year, said in October it would raise pay by an average of 8 percent this year for its employees in India. Markets will be keen on the company's comments on business and pricing trends, hiring and IT budgets of its overseas clients in 2010. Last month, Accenture reported a fall in first quarter earnings and gave a sales outlook for the current quarter that was weaker than analysts' expectations.

MARGIN PRESSURES
Infosys expects revenue growth in the fiscal year starting in April to be better than this year as a recovery in the global economy spurs investments by its clients, a senior official told Reuters last month. Consultant Gartner said major British and U.S. firms are focusing on a return to revenue growth in 2010 over cost-cutting, and information technology was central to their recovery strategies. Brokerage Angel Securities said Infosys profit margins are set to drop 245 basis points in Oct-Dec from the preceding quarter due to a 3.4 percent rise in the rupee and salary hikes. Tata Consultancy and Wipro should report margins fell 62 basis points and 38 basis points, respectively, it said. In the quarter, Tata Consultancy shares gained 21 percent and Infosys rose 13 percent versus a 14 percent jump in the sector index and a 2 percent rise in the broader market.

TCS, Infy, Wipro losing contracts to Emerging rivals

BANGALORE: Emerging nearshore rivals, including Ness Technologies of Israel, CPM Braxis of Brazil and Mexico-headquartered Softtek are increasingly becoming attractive for top outsourcing customers such as GE, Citibank and several others seeking to work with local, specialised vendors instead of sending all projects to offshore locations like India.

At a time when India’s top tech firms Tata Consultancy Services (TCS), Infosys and Wipro are redefining their positioning as global services providers by growing their presence in the emerging markets of Latin America, Eastern Europe and Asia, they face stiff competition from these newer rivals.

“For many customers who already have significant presence in offshore locations like India, it’s a risk diversification,” said Jimit Arora, research director of outsourcing advisory firm Everest Group. “Some customers having 70-80 per cent of their offshore resources in India are realising that they need to look at the third category of suppliers that are local and niche,” he added.

Over the past two years, companies such as CPM Braxis, EPAM Systems, Ness Technologies, Softtek, Merchants and Spi Global have emerged as stronger rivals for Indian tech firms, especially while bidding for an outsourcing contract being fleshed out by a ‘first-time outsourcer’.

“When it comes to new business from the first-time outsourcers, these local suppliers may be gaining at the expense of multinational and offshore rivals,” added Amneet Singh, vice-president, global sourcing at the Everest Group. Mr Singh, along with Mr Arora, researched the six emerging suppliers and found that they have been growing at an average compounded growth of around 25% annually during the past few years.

Brazilian firm CPM Braxis, for instance, which counts GE, ABN Amro and Whirlpool as clients, reported revenues of around $567 million in 2008. One of the top four Brazilian banks, Bradesco, is also among the biggest customers for the company.

“Some customers, including Bradesco, would rather work with a local supplier, there’s nothing wrong. For large MNC customers, offshoring continues to be a priority,” said a senior executive at one of the top Indian tech firms. He requested anonymity because his company is currently in a financial silent period.

While these emerging outsourcing rivals are not yet in the big league of mega, multi-year contracts, they are still able to gain business because of their niche and local market expertise. On an average, these companies are able to win contracts worth $2-5 million in annual contract value.

Meanwhile, for Indian tech firms seeking to grow their base outside their home country, these emerging companies also offer potential M&A opportunities.

“Many emerging companies we spoke with believe they can become $1-billion company on their own. However, some admitted that they would be open to inorganic opportunities too,” said Mr Arora.

Indeed, emerging service providers in countries of Brazil, Argentina and Mexico such as Globant, which counts Adidas, Linked IN and Citi among its top customer and has around $100 million in revenues, are increasingly being approached by some Indian tech firms, officials told ET on condition of anonymity.

“We have had discussions with both Softtek and Globant, but I cannot comment any further,” said a senior executive at one of the tech firms exploring inorganic growth route for expansion in the emerging markets. Experts believe such fast-growing firms always make a good acquisition target.

“Given where these companies are in terms of their size and capabilities, they do make good acquisition targets for Indian companies,” agreed Mr Singh.

What makes these firms really attractive is their strong presence in some of the fastest-growing markets for software services. For instance, Ness generates about a third, or $170 million, of its revenues from Eastern European markets of Czech Republic, Slovakia, Hungary and Romania.

“One of the more interesting prospects in this region relates to government initiatives, particularly as it relates to a ‘digitisation’ grant for the EU worth more than 10 billion euro, with ‘must use’ clauses by 2013,” observed James Friedman, analyst at the financial broking firm Susquehanna International Group (SIG).

“Ness is competing actively for this work in a number of regions, and expects Eastern Europe may improve by H2 of 2010, still targeting $300 million from this region by 2012,” he added.