The Hindu Business Line : TCS Q3: Sedate, but deal pipeline may hold the key

On the face of it, TCS’ numbers do not provide any indications of any negative developments in the IT sector. The company’s revenues grew 5 per cent sequentially over the September quarter to Rs 5,923 crore.

EBITDA (Earnings before interest, depreciation and taxes) grew 6 per cent to Rs 1,568 crore. The net profit grew to Rs 1,327 crore. From the market perspective, only spectacular numbers from TCS could have revived flagging interest in the sector. However, TCS has delivered results that were in line with market estimates. Had TCS managed better growth when compared to Infosys, this may have given confidence to the industry observers.

An analysis of TCS’ operating metrics throws light on the relatively slower revenue/margin expansion this quarter.

In terms of revenue contribution, India and Asia-Pacific have increased contribution. The deals in these geographies tend to be smaller in size than those offshored from the US, UK and tend to offer lower profit margins. There has been no material improvement in service mix – high value services such as consulting, engineering and infrastructure management have maintained their level of contribution to revenues, making volume-based services such as application development and maintenance the key contributor.

In terms of verticals as well, there is no notable change in the mix (BFSI has marginally increased contribution to 44 per cent).

Another factor that might explain lower margins is the increase in the contribution from onsite and global delivery centres/regional delivery centres(some of which are overseas), which tend to generate high-cost revenues.

Outlook

In terms of deal wins, the $1.2 billion deal with the Nielsen Company and other $100 million plus deals point to interesting prospects for TCS in the coming few quarters. Increasing levels of fixed-price billing to 45.4 per cent of revenues, the highest among Tier I players, is a positive, as this is a more efficient way of engagement. Increased delivery of services such as consulting from offshore locations could make this a ‘low-cost high revenue’ proposition, a healthy indicator on margins. The company could also tweak factors such as utilisation and repeat-business percentages, apart from using billing rates to improve realisations.

However, from an investment perspective, the recent slew of multi-billion dollar write-offs by global financial majors in the US creates fresh uncertainty on IT budgets for this year in the BFSI segment. The management itself has indicated that it is ‘cautiously optimistic’ of the situation. Perhaps by the end of the current quarter clarity on the extent of the sub-prime losses, a possible slowdown in the US economy and their effect on IT budgets may emerge.