TCS, which reported its results yesterday, had some good things to say. It has got more clients, revenues in its financial services segment grew and a weaker rupee propped up revenue growth. But the negatives were equally strong: billing rates have dropped, demand in key segments like manufacturing, telecom and hi-tech is slowing and outlook for the year appears gloomy.
Performance Highlights
- Revenues fell by 5.5% to $1.43bn in the March 2009 quarter, over the same period last year. On a sequential basis, the decline was 3.4%. Revenues, based on Indian Gaap, rose by 18.5% to Rs 7,172 crore over the same period last year. On a sequential basis, it declined by 1.4%. A weak rupee in FY’09 helped TCS post better revenue numbers, as it got more rupees for the same amount of dollar revenues, compared to last year.
- Operating margins improved during the quarter, due to cost cutting measures. Total expenditure increased by 17.5%, and operating margin improved by 61 basis points to 25.8% (1% = 100 basis points). In dollar terms, its expenses had actually declined by 7.4% over the previous year.
- This quarter includes the performance of the Citi BPO, excluding which sales would have declined further. The company’s BPO business now contributes to 11% of revenues compared to 5.8% in the preceding quarter.
- The main segment BFSI (Banking, financial services and insurance) which contributes more than half of revenues did well to hold up. The problem spots are in telecom, manufacturing and hi-tech, which together contribute to over a fourth of revenues. TCS expects these sectors’ contribution to continue weakening in 2009-10.
- TCS is lowering onsite exposure to lower costs by having more manpower on a project deployed in low cost locations like India. This unfortunately also lowers revenue growth as onsite billing rates tend to be higher. It is also increasing the proportion of fixed price and time contracts, to provide revenue stability.
- There is a perceptible slowdown in recruitment. Net additions in the fourth quarter were only 521 compared to 3,286 a year ago.
- Under US Gaap, its net profit declined by 16.8% to $263mn in the March 2009 quarter, over the same period last year. Under Indian Gaap, its net profit increased by 7% rise in net profit to Rs 1,333 crore.
- The company will be issuing bonus shares to its shareholders in the ratio of 1:1, perhaps to compensate for the bad news on the business front
Outlook
Though TCS does not give guidance, it expects business to be affected by the problems facing clients in western countries. It also expects sales growth to get affected due to a fall in billing rates –clients are demanding a reduction of 4% to 15%. It also seems unlikely that the rupee would depreciate significantly during the year, so the buffer will be thinner this year. The current outlook seems gloomy but the IT sector’s fortunes can turn around quite swiftly, as seen in the past. The first half’s performance it appears will remain depressed but the outlook for the longer term will become clearer by then.