TCS beats expectations with 26.7% rise in net; bullish on FY'14

Country's largest software exporter TCS Monday posted better-than-expected 26.7 percent jump in net profit at Rs 3,550 crore for the October-December quarter, while sounding bullish about the next fiscal and raising hopes that IT sector may have turned the corner.

Last Updated: Jan 14, 2013, 21:39 PM IST

Mumbai: Country's largest software exporter TCS Monday posted better-than-expected 26.7 percent jump in net profit at Rs 3,550 crore for the October-December quarter, while sounding bullish about the next fiscal and raising hopes that IT sector may have turned the corner.

Tata Consultancy Services had logged net profit of Rs 2,803 crore in the year-ago period. The numbers are according to the Indian accounting standard, Gaap.

"Fundamentally, FY'14 will be a better year than the current fiscal (2012-13). We see that the momentum is good, customers are embracing new technologies. From customers point of view, we are not seeing any cause for worry," TCS Chief Executive and Managing Director N Chandrasekaran told reporters at the company's headquarters here.

TCS, unlike its immediate peer Infosys, does not offer revenue or profit guidance as a policy.

During the October-December quarter, all the sectors and regions, barring telecom, helped the company report better growth numbers. However, the holiday season furloughs resulted in a muted revenue growth of 2.9 percent on a sequential basis to Rs 16,070 crore, he said, adding that clients in the financial services sector have also reported the phenomenon.

"It’s an unusual phenomenon...We have had furloughs, which typically used to happen in the manufacturing and hi-tech sectors. But this year we saw even financial services impacted by this," Chandrasekaran said.

Although the result was announced after market hours, TCS stock closed the day 2.14 percent up amid upsurge in the broader market.

"The numbers are broadly in line with their expectations. But the EBIT margins came in better than expected at 27.3 percent, which helped the company beat the overall net numbers of 3.5 percent," Religare Capital Markets' IT and telecoms research analyst Rumit Dugar said.

The sectoral bellwether Infosys had opened the earnings season with market-beating numbers on Friday, after disappointing investors with poor earnings and guidance for more than two years. It fuelled expectations that the sector has turned the corner, with Infosys scrip rallying nearly 20 percent.

The USD 100-billion domestic IT services sector has been under pressure due to the woes of the Western economies, as they draw over 85 percent of their revenues from those markets.

Infosys had also raised its full-year revenue forecast after new client additions and saw an acceleration in IT spending by its existing customers, which helped the Bangalore -based company post stronger-than-expected numbers.

"Overall a steady quarter from TCS and better than expected margin performance is a positive surprise. Further growth in consulting, which is discretionary, is encouraging.

"We continue to remain constructive on the large-cap tech names and believe that valuations remain reasonable and a recovery in tech spends could drive EPS/multiple upgrades," Dugar said.

Kotak Securities private client group research head Dipen Shah said: "The subdued volume growth at 1.25 percent was due to furloughs even from sectors like BFSI. However, average realisation surprised with a growth of about 1.3 percent."

On the better-than-expected spike in margins, he said the performance was better than what we had estimated. "However, we expect growth rates to pick up, going ahead. The company has indicated confidence in Q4 and FY14 on the back of strong traction and continuing demand."

During the quarter, the Tata Group company added as many as 31 clients, including two in the USD 100 million revenue bracket.

Continental Europe, except Britain, saw a de-growth during the quarter, which Chandrasekaran termed as a "one-off", while the telecom and allied services sector continued to be a concern with a negative 4.6 percent growth.

TCS Chief Financial Officer S Mahalingam, who retires next month, said the company had a negative impact of over Rs 160 crore due to currency fluctuations and added that TCS currently has USD 2.9 billion hedged at Rs 52 to the dollar as the median.

TCS revenue rose 21.7 percent to Rs 16,070 crore in the third quarter of 2012-13, from Rs 13,204 crore in the year-ago period.

On the hiring front, the company said it has nearly achieved its annual hiring target, hiring 49,600 professionals by December itself. HR head Ajoy Mukherjee said any more new hiring during the current quarter will see it exceeding its target of 50,000.

The company had given guidance of hiring 25,000 freshers from the campuses this fiscal and offer letters have already been given to 24,000 of them who are expected to join starting June, Mukherjee said, adding the net additions stood at 9,561, taking total headcount to 263,637.

On the revenue expectation front, Chandrasekaran declined to give a clear guidance, but said TCS will beat industry body Nasscom's revenue growth expectation.

"Originally when they (Nasscom) gave the number 11-14 percent (growth), the rupee was at a certain level in February 2012. You should take that rupee level and 11-14 percent in account. I said we would beat the upper end of the Nasscom and we still hold it," he said.

In October, Nasscom had lowered its growth forecast to 11 percent, citing the continued troubles in the Eurozone economies.

On the margins front, the operating margin on a IFRS basis widened by 0.51 percent during the quarter on sequential basis to 26.8 percent and Mahalingam sounded confident of achieving its aspirational number of 27 percent this fiscal.

The company gained 0.03 percent in exchange rate, 0.16 percent through offshore gains and 0.82 percent through production efficiency improvement but lost 0.50 percent on account of costs going up, Mahalingam explained.