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.