TCS's first-quarter results show a 9 per cent increase in operating income to $367 million, which is impressive on the back of a 3 per cent drop in top-line revenues, down to $1.48 billion. This was ahead of market expectations (hence the 19 per cent jump in the share price on the announcement). Is this yet another pointer towards a recovery in the tech sector, with positive results coming from IBM and Oracle over this most difficult of quarters? Our view is that the strong focus on cost containment in the past period is paying dividends, although there is a concern about the lack of new business flowing through the books.
Cost control has paid off
Although TCSs revenues have dropped, its operating income has increased substantially. This highlights the value of its recent managing the business with optimal efficiency drive, which has been achieved through a combination of factors such as managing employee costs and realising 20 per cent reductions in charges for rent, travel and external fees.
For the first time in the companys history, employee count has fallen by almost 2,000. In addition to the cost cutting, TCS has been proactively moving more work offshore (this proportion has risen to 55.6 per cent from 45.1 per cent 12 months prior, including global delivery centres).
Interestingly, we believe that TCS has been able to resist the majority of the recent pricing pressures from existing clients through its strong client relationships and a broader range of services than most offshore players, enabling it to have a greater level of cross-selling options.
New business growth lagging
But it is not all rosy. As with every international organisation, the curse of the depreciating US dollar (and for TCS the appreciating rupee) has negatively impacted revenues and income streams over the past 12 months, and TCSs high exposure to the North American market (52.3 per cent of revenues) has not helped.
However, the rupee situation has opened up other doors. The shining lights have been the Indian and Asia-Pacific regions (with contributions up to 9.1 per cent and 4.3 per cent of total income respectively) with offerings in the systems integration, applications outsourcing and remote infrastructure management areas pleasingly strong.
From an industry perspective, banking and finance has grown to a 43.9 per cent proportion on the back of this industrys returning stability, and appears to justify TCSs ongoing investment in this sector, from its transformation platform Diligenta through to the Aspire reconciliation-as-a-service offering.
Maybe of bigger concern is the fact that only 26 new clients (and only 0.7 per cent of new revenue contributions, down from 6.9 per cent) have been added during the quarter (all with contributions of less than $5 million), alongside a fall in its active client count to 933 from 985. This may be due to a focus on client retention in turbulent times, or possibly underinvestment in sales resources, or TCSs unwillingness to enter into pricing wars. The likelihood is a combination of all three. However, with the top ten clients contributing 28 per cent of revenues, an increase over the previous period, there is a growing dependency, and thus risk, on existing clients.
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