Tata Consultancy Services (TCS), the technology sector’s newest bellwether, is on track to meet its FY13 growth target, if the management commentary is anything to go by. Before the second quarter comes to a close and the company heads into its silent period, it conveyed to analysts how the quarter has been. First, TCS is on track to grow faster than the industry’s estimated 11-14 per cent growth (in constant currency). The second quarter has seen no major shift in demand or project cancellations, which were big concerns.
While the demand environment may not be challenged, the company is also not likely to repeat its first quarter performance. In the first quarter, the company clocked a 5.3 per cent volume growth, as the Friends’ Life deal that it had won saw ramp-ups. However, with the project stabilising, the volume growth sequentially is likely to be in the range of 4.5-4.8 per cent in the second quarter. Cross-currency fluctuations are expected to eat into the company’s dollar revenues, which could be in the range of 4-4.5 per cent sequentially.
The management has conveyed to analysts that it does not see any major challenges in terms of growth. Geographically, it is expecting no slowdown in growth in any region. In terms of verticals, the company does not expect to meet its average growth rate in the banking and financial services sector. Telecom is also expected to continue to see weakness. Revenue growth is likely to be supported by industries like retail, manufacturing and high-tech.
However, what is of concern is the company’s commentary on margins. Though the rupee has depreciated to Rs 55.29 (average for the quarter) against the dollar in Q2 from Rs 54.18 in Q1, the company is not expecting any uptick in margins. Typically, the second quarter is good for margins but this time around it is not likely due to freshers joining in the quarter, project ramp-ups from India and Asia-Pacific (which are of lower margins) and marginal shift to onsite for new deal starts, explains Ankita Somani of Angel Broking. According to Morgan Stanley: “TCS internally works on an EBIT (earnings before interest and taxes) margin target of 27 per cent for a rupee rate of Rs 48 per dollar. Even though quarter-on-quarter reported margins are likely to be down in the second quarter, full-year margins should still be maintained year-on-year given the strong rupee tailwind.” The overall commentary, however, remains strong.