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TCS to bag big deals without compromising marginsnews
Our Corporate Bureau
17 October 2006

Tata Consultancy Services has come out with Q2 numbers that have beat Street expectations. The company's net profit was up 14.95 per cent from Rs 862.6 crore to Rs 991.5 crore, quarter-on-quarter, QoQ.

In response to these figures put out, the management of TCS discusses the company's future outlook and guidance going forward. S Ramadorai, managing director and chief executive officer, TCS, says that there are a number of deals in the pipeline, which will be closed soon.

The company's CFO, S Mahalingam says that TCS will continue to look at a revenue shift for higher margins.

The management also says that it has managed to grow more clients across portfolios, and that it is confident of bagging big deals without compromising margins.

An important factor that S Ramadorai, focused on the growth momentum. "Growth with profitability is very fundamental to us so we will focus again on operating efficiency, offshore leveraging and growth. There are number of deals in the pipeline that we plan to close."

N Chandrasekaran, head, sales and operations, says that the deal pipeline is quite strong across geographies. Out of the $50 million plus deals, he says that they are currently negotiating five deals. "Also, we have a healthy pipeline of a few $100 million deals and five to10 $50 million deals on top of that. So I think the environment on the demand side is pretty robust," he adds.

These deals are from sectors across the board. However, Chandrasekaran specifies BFSI (banking, financial services and insurance), retail and pharma, and adds that there are also some deals going on in utilities and other sectors.

N G Subramanium, vice president and head of banking practice, further discusses these contracts from a pricing perspective. He says, "For large contracts that are upcoming in terms of system integration or asset leverage solutions, we see tremendous amount of traction anywhere between 5-10 per cent."

When asked about the company's top 20 client contracts renewals over the next six months, Chandrasekaran says that TCS has negotiated at least two contracts, however the statistics cannot be disclosed.

He further goes on to say that these contracts are usually of three-year duration and every three-year they come up for renewal. "They are spread out and therefore never come together for renewal, and so some contract or the other comes in every one or two quarters," he adds.

From a human resource perspective, S Padmanabhan, global head, HR, says that in the current quarter the company added over 8,900 employees, of which 3,600 were from the campuses, 4,200 were experienced professionals from the market, and close to 1,000 people from outside India.

"This is the overall recruitment numbers and for the next two quarters, and we want to add another 15,000 gross. This is in line with our overall plan for the year," he says.

On the debate of the effect on the US economic slowdown on tech companies, Ramadorai says that TCS' global footprint it is not exposure to one country alone but to many others, including Asia Pacific, Europe, UK, Latin America, US and Canada.

When asked about inorganic growth going forward, Ramadorai said their focus is on growth and operating margins. "We will just single-mindedly focus on growth and operating margins. If there is an opportunity, which enhances it, that is when we look at it, not otherwise."

Ramadorai believes that offshore leverages and price efficiency have contributed to numbers and that the company would continue to focus on operating efficiency, offshore leveraging and growth, which is fundamental to the profitability of the organisation.

He said, "The offshore leverage and the price increases with the operating efficiencies in terms of productivity. When you combine all of them, it is an integrated play and we really focussed and fired all the cylinders and that has shown in our results and it is a great team effort."

Ramadorai further stated, "We don't give guidance. We clearly give the directions; the important point to be communicated is that there is a growth momentum and growth with profitability is very fundamental to us. So we will focus on operating efficiency, offshore leveraging and growth. There are number of deals in the pipeline that we plan to close. So we believe that we''ve a great story to tell as we move into the first two quarters."

On the high operating margin expansion that has been posted, Mahalingam said, "The margin improvement came as a result of the right kind of revenues going up and that is where the international revenues went by close to 11 per cent. It was dictated by volume growth, which is 11.33 per cent as we said. But there is also an added component of surprising improvement that was very critical that gave us a little over 1 per cent because of the manner in which the rupee had moved over that period and so on and that gave us some improvement."

The company's management is of the opinion that added impetus to margins came from pricing. They believe that better pricing would increase margins by 15-25 bps.

"If you look at our revenue, about 95 per cent comes from our existing customers and 3-5 per cent comes from the new contracts. In those new contracts, we are able to see that kind of a price increase that is a possibility of 15-25 basis point improvement on margins over a period of time just on that front," said Chandrashekharan.

The company intends to to add 15,000 employees in H2. It also added there would be no major pressure on margins seen due to salary hikes.

"This year, we had planned at total of 30,000 gross addition. In the first two quarters put together, we have added 15,000 people totally. This quarter alone, we added around 8,900 plus, of which 3,600 were from the campuses, 4,200 from the market what we call as experienced professionals. We hired close to 1000 people outside India, so this is the overall recruitment numbers. For the next two quarters, we want to add another 15,000 gross and this is in line with our overall plan for the year," said Padmanabhan.

On concluding lines, Ramadorai re-iterated the company's stance, "Our focus is on growth and operating margins, so we will just single-mindedly focus on that. If there is an opportunity, which enhances that, then that is when we look at it, not otherwise."

Commenting on TCS' results, Dipen Shah of Kotak PCG told CNBC-TV18, "The results were in line. Though I need to say that the headline numbers look above expectations. 8 per cent revenue growth was very much there though it has been impacted to a certain extent by offshore.

"The important point is the 300 bps improvement in the margins. But if we understand correctly from yesterday''s conference call there was a one-time component write back of about Rs 35 crore in this EBITDA and also the provisions had gone down significantly.

"So these are the kind of figures, which we had not anticipated and probably could be one time. To that extent, if we adjust the earnings per share, it was very much inline. However, Infosys Technologies and TCS have made encouraging remarks about the macro picture.

"There is no impact whatsoever of the slowdown, which is currently undergoing in the US. Also TCS'' comments on billing rates were to our surprise. So just because of improvement in the macro picture, and just because of no impact as of now of the US slowdown, we tend to get more positive on TCS also and have suitably upgraded our estimates and targets."

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TCS to bag big deals without compromising margins