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TCS reinforces investors' faith in frontline IT stocksnews
Rex Mathew
17 October 2006

After Infosys' spectacular performance, TCS has come out with an encore and has reinforced investors' faith in frontline IT services companies.

TCS, the largest IT services company in Asia and the second IT major to announce second quarter results - after Infosys' spectacular show last week - has delivered numbers, which are better than analyst forecasts. The results have reinforced the view that large Indian IT services companies are seeing very strong business momentum and are not likely to be affected by the anticipated US slowdown.

After the Infosys results, the big question was whether other frontline IT companies would also be able to deliver similar results. TCS has managed to nearly match Infosys in sequential bottom line growth. However, sequential revenue growth is lower than Infosys as the base was higher for TCS. The company has managed to considerably improve its operating margins, mostly through better pricing and a reduction in other operating expenses.

Consolidated net profits of TCS for the quarter ended 30 September 2006 increased 43.37 per cent to Rs 1,018.68 crore or Rs 10.41 per share from Rs 710.52 crore or Rs 7.26 per share for the same quarter of previous year. Sequentially, net profits have increased 15.41 per cent from Rs 882.66 crore or Rs 9.02 per share for the previous quarter ended June 2006.

Consolidated revenues, including equipment sale, for the quarter went up 42.43 per cent to Rs 4,494.83 crore from Rs 3,155.82 for the previous year quarter and 8.18 per cent sequentially from Rs 4,154.85 crore for the previous quarter. Revenues from IT services increased 47.25 per cent year-on-year and 9.88 per cent sequentially.

Consensus estimates of TCS' second quarter net profits were in the range of Rs 930 crore to Rs 940 crore on revenues of between Rs 4,435 and Rs 4,480 crore.

Operating profits or EBITDA - excluding other income - has increased 39.95 per cent to Rs1,251.74 crore from Rs 894.41 crore for the previous year quarter. Sequentially, operating profits have gone up 21.55 per cent from Rs 1,029.79 crore for the previous year.

The sequential improvement in operating margins for TCS is very significant and higher than expected. Operating margins as a percentage of total revenues were at 27.85 per cent - an improvement of 306 basis points from 24.79 per cent for the previous quarter. However, operating margins are still lower than the 28.34 per cent reported for the previous year quarter.

Employee costs increased 7.11 per cent sequentially and 54.43 per cent year-on-year. Overseas operating expenses went up 8.46 per cent over the previous quarter while other operating expenses showed a modest sequential decline.

Other income declined substantially to Rs19.09 crore from Rs 72.18 crore for the previous quarter and Rs 35.07 crore for the previous year quarter. The company posted a marginal exchange loss of less than Rs 1 crore for the quarter.

TCS added 58 new clients during the quarter and client concentration remained more or less unchanged. Top five clients contributed 16.8 per cent of total revenues during the quarter as compared to 16.7 per cent for the previous quarter. Contribution of top ten clients remained steady at 26.8 per cent. However, the share of its top client - GE - increased to 4.9 per cent from 4 per cent for the previous quarter.

Revenues from new clients increased to 2.1 per cent of total revenues from 1.2 per cent during the previous quarter. The number of clients contributing $1 million or more has increased to 274 from 258 during the previous quarter. The number of $10 million clients has increased to 70 from 65 while $20 million clients numbered 15 as compared to 10 during the previous quarter.

Share of offshore services in total revenues improved to 41 per cent during the quarter as compared to 38.1 per cent for the previous quarter and 37.3 per cent for the previous year quarter. Fixed priced contracts declined to 40.9 per cent of total revenues sequentially from 43.6 per cent.

Share of application development and maintenance in total revenues improved marginally to 52.1 per cent from 52 per cent for previous quarter but declined substantially from 59.8 per cent for the previous year quarter. Share of enterprise solutions declined to 12 per cent sequentially from 13 per cent. Share of infrastructure services declined to 6 per cent from 6.8 per cent while business intelligence saw its share increasing to 9.6 per cent from 8.7 per cent.

The recent acquisitions by TCS in the BPO space have lifted the contribution of BPO services in total revenues to 5.8 per cent from 5.7 per cent during the previous quarter and a substantially lower 1.3 per cent during the previous year quarter. Consulting revenues improved to 3.5 per cent from 3.2 per cent for the June 2006 quarter and 2.7 per cent for the September 2005 quarter.

In terms of verticals, banking, financial services and insurance (BFSI) remains the mainstay with a share of 42.7 per cent in total revenues as compared to 41.2 per cent for the previous quarter. Share of manufacturing has declined to 15.3 per cent from 16 per cent while telecom has improved its share to 16.6 per cent 16.5 per cent for the previous quarter.

North American revenues were at 53.5 per cent as compared to 53.2 per cent while South American revenues increased to 3.5 per cent from 2.9 per cent. Revenues from Europe increased to 28.5 per cent from 27.7 per cent - with UK contributing 20.7 per cent. Domestic revenues declined to 8.4 per cent from 10.6 per cent for the previous quarter.

TCS added a net 6,663 employees during the quarter, taking the total employee strength to 78,028 - including subsidiaries. The company has so far made 11,250 new offers on campuses for recruitment during the next financial year. Employee utilisation rate, including trainees, declined to 75.2 per cent for the quarter from 77.3 per cent for the previous quarter while the attrition rate remained steady at 10.6 per cent. TCS has the lowest attrition rates among Indian IT services companies.

Guidance: As a policy, TCS does not give any profit or revenue guidance. However, the senior management said they are confident of crossing the $4 billion revenue mark during this financial year.


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TCS reinforces investors' faith in frontline IT stocks