TCS posts 35.65% increase in net profit; but margins remain steady
Sucheta Dalal 13 Jul 2012

Tata Consultancy Services has reported its Q1 results for the fiscal 2012-13. Its margins were impacted by increases in wage bill, on-boarding costs and visa bill despite a fall in rupee

Moneylife Digital Team


Tata Consultancy Services (TCS), a behemoth IT Indian company, has posted a 35.65% year-on-year (y-o-y) increase in net profit to Rs2797.59 crore for the quarter ended 30 June 2012 compared to Rs2062.43 crore for the corresponding period last year. However, its net profit margin was 24.52%, which remained more or less the same from the corresponding period last year, despite the fall in the rupee. For the same time period, its total revenue increased 33.15% y-o-y, from Rs8,696.81 crore to Rs11,579.91 crore.
 

If one looks at the numbers, it revenue growth is largely in line with its historic patterns. Its current quarter revenue growth rate is in line with its three-quarter y-o-y growth rate of 35%. However, the decline in the rupee would have ideally boosted its revenue, but it hasn’t. This could be a concern as underlying business could be under pressure or the company is not increasing its billing rates in order to retain customers. Its operating profit showed some positive signs, growing at an impressive 42% when compared to three-quarter y-o-y growth of 34%. Its operating profit margin (OPM) grew by 140 basis percentage points to 30.24%. This was due to prudent cost management. Given its return of networth (47%, based on the preceding four quarters), as well as its reputation, its valuation is slightly on the higher end, with market-capitalisation quoting 17 times its operating profit.
 

N Chandrasekaran, TCS CEO and managing director, said, “We’ve seen strong, secular growth across all our service lines and industry segments driven by robust volumes from key markets like North America, Europe and UK”. He further added, “We continue to see good demand from global corporations as they successfully navigate an increasingly complex business environment. Our investments in new technologies and platforms are bearing fruit with increasing market traction and we are confident of playing a pivotal role in our customers’ future business evolution.” When asked about the impact of pricing, he said that he doesn’t see any erosion in pricing.
 

In a deteriorating rupee regime, one would have expected the company to post stellar figures. However, the exchange rate impact was only 2.76% increase while this was countered with a 2% increase in its wage bill. Mr Chandrasekeran said that there were three headwinds namely wage bill, on-boarding costs and visa costs, and all three has impacted margins.
 

Geographically, all businesses grew, except India. North America grew 3% on constant currency basis while India showed a decline of 7% on constant currency basis, thus underscoring a challenging domestic economic climate. Its telecom vertical, which was laggard for a long time, grew 7% on a constant currency basis, whereas banking financial services & insurance (BFSI), its biggest vertical, grew at 5.73%. It gets 42% of revenues from BFSI, 7.9% from manufacturing, 13% from retail & packaged goods, 12% from telecom, media & entertainment, while the remainder is derived from various other industries.
 

The company has added 29 new clients in the latest quarter while attrition was recorded at 12%. It added 13,831 employees while utilisation rates were at 72.3%, which is fair though not impressive. The total employee strength of the company inthe quarter ended June stood at 2,43,545.
 

The highlight was signing a $100+ contract with a leading North American retailer as its transformation partner.