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K.Venkatasubramanian

BL Research Bureau The numbers delivered by TCS this quarter have been in line with market expectations, but concerns on BFSI clientele and pricing pressure still hold.

Reduced selling and marketing expenses and improved repeat business percentage are operational positives.

But increasing contribution from high cost onsite revenues and increasing share of low-margin application development and maintenance (ADM) services may have pressurised margins.

TCS’ revenues have grown 5.9 per cent sequentially to Rs 6,098 crore, while net-profit has increased by 3.7 per cent to Rs 1,291 crore.

TCS has indicated that volume growth is 1.3 per cent over the previous quarter, compared to the 6 per cent levels that normally has been the case in the last few quarters.

The lower volume growth reflects similar trends from Infosys, which saw a 0.5 per cent volume growth in the June quarter.

The rupee depreciation of around 7 per cent in the April-June period may have allowed them this cushion.

The company has had a forex loss of Rs 75 crore this quarter. It has hedged about $2.1 billion to manage costs and prevent erosion in realisations.

North America (51.1 per cent of revenues) has increased contribution over the previous quarter, a similarity shared with Infosys.

This lends some credence to the reasoning that US clientele may be looking at outsourcing/offshoring more projects to cut costs in a difficult environment.

But concerns on the banking clients (42.5 per cent of revenues) persist, what with a marginal decline in contribution over the previous quarter.

But significantly, a large European banking client is undergoing a de-merger process which raises concerns on IT spends.

The average billing rates have also fallen 0.9 per cent this quarter, which clouds the pricing environment on new deals, especially large ones.

ADM services that were lower for Infosys have actually increased for TCS (46.9 per cent of revenues) over the previous quarter.

The onsite component of revenues has also increased this quarter, which may due to new projects’ transition phase, while the contrary was expected to optimise costs. Time and material billing mode, a method less lucrative than fixed-billing method for resource planning and realisations, has gone up this quarter.

But selling and marketing expenses have come down by 4.3 per cent over the previous quarter and repeat business has gone up to 99.3 per cent indicating better client-mining strategies.

As with Infosys, TCS also has headroom in tweaking operational levers such as utilisation, increasing offshore component (after transition is over in large deals) and also driving greater volume growth in the next few quarters.

But macro-risks and downward negotiation in pricing and delays or dips in IT spends remain key concerns.

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