US, UK, Europe biz of TCS grows by 6% QoQ

By Raja Rajeshwari , CNBC-TV18

India's largest IT exporter, Tata Consultancy Services, TCS has announced its first quarter numbers. It has posted consolidated net profit of Rs 1,243.6 crore for the quarter ended June 2008 as against Rs 1,255.9 crore in previous quarter, degrowth of 0.98% and revenues of Rs 6,411 crore versus Rs 6,094.7 crore (US GAAP), a growth of 5.2%.

TCS results was in line with market expectations

TCS - Topline growth

• Volume growth of 1.3%
• Pricing fall of 90 bps over and above 160 bps fall in Q4
• Rupee depreciation gave a fillip of 5.1%
• Change in effort to onsite 50 bps
• Pricing declined due to transitioning of project and lower product revenues on delay in decision making by clients.
• Drop in pricing also due to fixed price revenues going down, project related revenues going down 
• Higher onsite due to ramp up in manufacturing and retail verticals
• Slower volume growth due to client issues with 3 clients
  1. Free transitioning client – over will ramp up for this quarter
  2. One client who stopped till Q2 – is also ramping up
  3. One EU bank going through demerger – Will see hit in Q2; hit will be smaller than seen in Q1
  (Some analysts are saying issues with AIG) co saying no-no issues
• Co says Operating Margins – down 0.26% to 22.06% vs 22.32% in Q1
• Co adds depreciation and reports!
• Co says if it not had changed the depreciation method – margins would be lower by 100bps
• + ve kick – SG&A : 194 bps & forex impact : 263 bps, depreciation change : 87 bps
•  - ve kick :onsite shift 17 bps, change in depreciation wage : 196 bps, Pricing and productivity – 2.94% negative  

EBIDTA margins fall of 159 bps as we compute! Without depreciation included

OPM’s              NPM’s

Q109                23.88%             19.4% -lower other income and lower Ebidta!

Q4                    25.47%             20.6%

Q3                    26.7%               22.4%

Q2                    26.3%               22.1%

Q108                25.5%               22.2%

CONTINUE TO MAINTAIN costs and maintain margins

TCS - Deal pipeline

• Won 12 large deals in the quarter (of which 3 are $ 75- 100 mn)
• Added 35 clients, Lowest client additions (as seen in past few quarters); co pushes it off saying normal nothing worrisome! number of active clients decreased to 885 from 904 QoQ
• 20 large deals – most of them BFSI space
• Still seeing deal wins in BFSI space
• RFP flows fine, tad better than Q4
• No Renegotiations on pricing till date; renewals at stable pricing ( no discounts also sought)  

TCS - Highlights

• US, UK, Europe grew by 6% QoQ
• BFSI faced growth problems  due to client specific issues in US
• BFSI client slowdown has been made up by other verticals
• Retail, lifesciences projects ramping up as expected
• New growth markets have grown at slower pace, cyclical and turnkey in nature
• Hit in Latam and India – India mostly from CMC and Latam hit due to EU demerged client who delayed revenues
• Taking control of what we have in hand and work in tough environment
• Severe cost cutting measures; SG&A expenses cut boost of 217 bps
• Billion dollars of cash in hand – to be used for capex
• Pricing stable – had contract renewal
• Environment Remains Uncertain For BFSI; Watch Out For Client Specific Issues And Proactively Take Care Of Them
• Rest of the demand remains strong
• Hikes as per what they announced - hikes of 8-10% in offshore employees; 3-4% for onsite ( way lower than peers)
• Vendor rationalisation highly likely in FY09
• Making investment 30000 seats in India; 1000 seater in Ohio
• Maintain 30000-35000 hiring in FY09; 24450 offers in new joinees..(higher employee addition + ve signal)  

TCS – Client specifics

• Contribution of top client declined to 6.2% vs 6.5% QoQ
• Top 5 customers declined from 18.9% to 18.5%.
• Top 10 clients contributed 28.3% (-80bp qoq) to revenues

HEDGE program

NOTE: follows cash flow method. MTM losses are calculated, whichever losses pertain for this quarter comes in profit and loss statement, rest will go into balance sheet, and will be passed into profit and loss as when they accrue!

• Like a insurance programme - To get benefits without taking hit on revenues
• Hedges worth a little over $ 2 billion
• Have most of the hedges as options, lower forwards
• Maximum forex loss on Q2, Q3, Q4 would be Rs 90 cr
• Forex losses booked under other income in Rs 75.3 cr in Q1
• Loss of Rs 4.08 billion in balance sheet which will impact in next 8-10 quarters
• If rupee does not move much from here then B/S losses will be Rs 1.68 billion
• At Rs 43, only 53% of our forwards would take a hit
• Participate on upside - 80% of hedges will help  

DID not participate in some UK deals such as Aviva – WNS why?

• Do not do voice work
• Seek deals with IT & transformational work also
• Platform based work – Insurance and HRO based
• Won client for Dilligenta last year, revenues flowing now  

TCS – RAMPUP

• Closed 6 large deals in Q4
• 2 clients on auto space ramping up
• 1 metal player ramping up
• One large deal won in Q1 will also ramp up