Get this: The rupee fell, but TCS lost money on US$!

What the business boys earned, the treasury boys lost at Tata consultancy Services (TCS), India’s largest software company.

Thanks to the rapid depreciation of the rupee, Infosys made huge profit gains from it. TCS actually lost money by wrongly hedging against the dollar, despite doing much better on the topline.

In the second quarter of 2011-12 (Q2) ended 30 September, TCS lost Rs 91 crore due to adverse forex movement. And it could get worse. The management says it has hedged $2.5 billion in revenues over the next two quarters and expects to maintain margins only if the rupee-dollar exchange rate remains at 46 or higher. With the rupee trading around 49 to the dollar, forex losses can mount going forward.

Net result: while Infosys surprised the market by posting better than expected guidance numbers, TCS has, to some extent, dampened the spirit.

[caption id=“attachment_109984” align=“alignleft” width=“380” caption=“Tata Consultancy Services (TCS) CEO and MD N Chandrasekaran in this file photo. AFP”]  [/caption]

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Compared to a market profit expectation of Rs 2,477 crore, TCS posted a IFRS (International Financial Reporting Standard) profit of Rs 2,439 crore, a growth of 14.7 percent. Since net profit for the quarter ended June under the IFRS was Rs 2,408 crore, the growth is just marginal.

According to Indian accounting standards, net profit was Rs 2,301 crore against Rs 2,169 crore in the corresponding quarter of the previous year. Net profit during the June quarter was Rs 2,440 crore. The lower profit number is largely due to higher provisions for tax on dividend from foreign subsidiaries.

Revenues of the company grew to Rs 11,633.48 crore from Rs 9,286.39 crore, a growth of 25.3 percent as compared to the previous year. The growth is 7.7 percent as compared to previous quarter. These growth numbers are much higher compared to Infosys, if it weren’t for the forex misjudgment.

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At the operating profit level the company posted a growth of 21.4 percent on a year on year basis at Rs 3,143 crore. As compared to the previous quarter, operating margins improved marginally by 94 basis points (100 basis points make one percent).

TCS has added 35 customers during the quarter and is currently chasing 10 big deals and hopes to close some between the third and fourth quarters. On the hiring front, as compared to an employee count of 198,614, TCS plans to add 60,000 employees for the year, a growth of 30 percent.

Going forward, however, the company has said that it is facing pricing pressure at least for the third quarter, which can contract its margin. In terms of geographical growth, the US markets have shown moderate growth but the European markets have surprised positively with a robust 38.5 percent (Continental Europe) growth year on year and 10.3 percent quarter on quarter.

As with every other IT company, TCS says the short term outlook remains challenging while the long term is good. Employee reductions by banks across the globe will affect growth from the Banking, Financial Services and Insurance (BFSI) space, which has been the main growth driver for IT companies. It looks like the short term challenge is likely to continue a little longer.