Both volumes and prices could be under pressure in a harsh operating environment.
The Street will be rather disappointed with Tata Consultancy Services’ net profit of Rs 1,262 crore for the September 2008 quarter given that it’s almost flat compared with the profit in the June quarter. But some part of that is due to hedging losses; that apart TCS hasn’t done too badly given its exposure to Wall Street and the current turmoil in global markets. The good news is that revenues from the banking and financial services space, which account for 42 per cent of the firms revenues, grew during the quarter.
The quarter also saw a higher level of offshoring. What’s more there was a small increase in prices--about 30 basis points-- and a six per cent increase in volumes. As a result, revenues were up by 8.5 per cent sequentially at Rs 6,953 crore. In the June quarter the increase in volumes had been very small. While selling costs have risen, other costs have been kept in check allowing the operating margins to expand by around 230 basis points to 26.2 per cent; had it not been for some additional provisioning for a couple of financial services accounts, which may be in trouble, the margins might have been slightly better.
Business appears to be fairly good with client additions at 51 during the quarter — in June TCS had added 35 clients. The half a dozen big deals including the Citigroup order which came with the BPO buyout, are impressive. Hiring too seems to be on track with around 35, 000 gross recruitments expected in the current year. Moreover, TCS continues to mine its clients well — the tech major has increased the number of clients across every segment — from those with a billing of $ one million to those that fetch revenues of $50 million.
While the results are satisfactory, the environment could get more challenging as a result of which TCS could face pressures on both the volumes and prices fronts. The financial problems as also the economic slowdown in the US and Europe are far from over. Moreover, adverse currency movements too seem to hurting profits of tech firms. While the stock price has corrected sharply to Rs 546, it’s difficult to say whether the worst is over. A clearer picture should emerge in the coming months.