TCS and the importance of being confident

When Tata Consultancy Services officials talk, one would wonder whether the global economy has any problem at all.

After last quarter earnings,I don't remember saying a single phrase that was not confident, replied Chief Financial Officer and Executive Director S Mahalingam to a reporter's question at the press conference announcing the earnings on Friday.

He said the company will retain its margins around 27 percent, pricing environment is stable, discretionary spending is picking up and the company is very positive about the outlook.

"We see the environment to be very positive. We are seeing not only the traditional deals coming in for renewals and happening in time, but we are also seeing an uptick in discretionary spends. So the momentum from our point of view is very good," CEO N Chandrasekaran told CNBC TV18 today.

He sounded cautious only about December, when usually the company "sees a loss in some of the industrial biz".

Are things as hunky-dory as TCS says? Reuters

"So that can affect the volumes a little bit in this quarter. Otherwise from the sentiment and momentum point of view, I see it to be a pretty good going," he said.

Everything positive, to the extent that one would think the country's top software exporter is in another world altogether.

But are things as hunky-dory as TCS says?

"While TCS has shown remarkable resilience on revenues, 13 percent YY $-growth in 1HFY13 c.f. 30 percent YY in 1HFY12 suggests that TCS has not been immune from the twin effects of a cyclical downtick and rising revenue base," said CLSA in a note.

However, it says unlike the April-June quarter when TCS's growth was driven mostly by Friends Life deal, "growth in this quarter was well-rounded".

But it believes "the deterioration in core profitability across the sector needs to be watched in the year ahead".

The task for the company is to maintain the growth on a large base. For this, it would have to sacrifice some of its margin thresholds on deals, the note said.

"We expect pricing pressures to only intensify ahead even as onsite salary costs and sub-contracting costs remain elevated," the brokerage said.

"Margins are likely to be an industry-wide casualty and TCS is unlikely to be insulated from the troubles," it said.

But TCS is confident. It had exuded the same confidence after the April-June earnings too. But later, the company cautioned that margin may get squeezed going forward and also volumes may decline.

Is there any surety that this time it is not going to be the same, considering the continuing rupee volatility?

"When rupee is in an appreciative state, we would have a different kind of a strategy to follow. So I don't think the current margin, which is very close to 27% is something away from what we had envisaged," Mahalingam told CNBC TV18 today.

Updated Date: Dec 20, 2014 12:59 PM

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