Bloomberg News

Tata Consultancy Net Lags Estimates as Clients Curb Spending

October 17, 2011

(Updates with comment from CEO in seventh paragraph.)

Oct. 17 (Bloomberg) -- Tata Consultancy Services Ltd., India’s largest software exporter, posted second-quarter profit that missed analysts’ estimates as a weaker-than-expected economic recovery made customers hold back technology spending.

Net income rose 15 percent to 24.4 billion rupees ($498 million) in the three months ended Sept. 30, Mumbai-based Tata Consultancy said in a statement today. Profit was projected at 25.2 billion rupees according to the median of 28 analysts’ estimates compiled by Bloomberg.

Chief Executive Officer N. Chandrasekaran said there was a lot of “negativism” among clients amid economic uncertainty. His counterpart at rival Infosys Ltd., S.D. Shibulal, last week said customers were delaying decisions on projects. The recovery in the U.S. still faces what Bank of Tokyo-Mitsubishi UFJ Ltd. economist Chris Rupkey calls “a lot of headwinds” from the sovereign-debt crisis in the euro zone to political gridlock over the budget of the world’s largest economy.

“IT spending reacts with a lag to macroeconomic headwinds and tailwinds, and to that extent we will see slightly weaker demand starting the next quarter,” said Hitesh Shah, vice president of research at IDFC Securities Ltd. in Mumbai.

Tata Consultancy declined 1.2 percent to 1,120.25 rupees at close in Mumbai trading before the earnings announcement, while the benchmark Sensitive Index slid 0.3 percent. The stock has climbed 14 percent in the past 12 months, outperforming the Sensex’s 16 percent fall. Infosys, India’s second-largest software company, has lost 12 percent.

Europe ‘Worrisome’

Revenue rose 25 percent to 116.3 billion rupees, from 92.9 billion rupees a year earlier. The median of 35 analysts’ estimates was 117 billion rupees.

The macroeconomic situation in Europe is “worrisome,” Chandrasekaran said at a briefing in Mumbai today. Still, “we are getting positive vibes from customers in terms of their IT spends going forward,” he said.

Tata Consultancy, which provides computer services and back office support to companies including Citigroup Inc. and Volkswagen AG, derived 52.9 percent of its first-quarter revenue from companies in North America, 15.3 percent from the U.K., and 9.9 percent from continental Europe.

‘Not as Bright’

Worldwide spending on technology goods and services by businesses and governments, which includes computer equipment and outsourcing, will grow 5.5 percent in 2012 to $2.15 trillion, slowing from an estimated 11.5 percent this year, according to a Sept. 16 report from Forrester Research Inc.

The outlook for demand in 2012 is “not as bright,” as weak economic growth in the U.S. and Europe will make business and governments more cautious about investing in technology, Cambridge, Massachusetts-based Forrester said.

U.S. gross domestic product is projected to expand 2 percent in 2012 from a 1.7 percent pace this year, according to the median of 80 economists surveyed by Bloomberg News from Oct. 5 to Oct. 11.

Tata Consultancy added 35 clients during the quarter, for a total of 1,010 active customers. The company had a 6.2 percent increase in volume in the three months ended Sept. 30 from the previous period. Volume at Infosys grew 4.5 percent, Chief Financial Officer V. Balakrishnan said Oct. 12.

Information-technology services companies define volume as the number of man-months workers spend on projects for clients.

Infosys shares rose the most in more than two years in Mumbai on Oct. 12, after the Bangalore-based software-services provider raised its full-year sales guidance and posted earnings that beat analyst expectations for the first time in a year. Infosys projected sales in the year to March to range between 335 billion rupees and 340.9 billion rupees.

Attrition Declines

Tata Consultancy added a net 12,580 employees during the quarter, for a total of 214,770, according to the statement.

Workers left Tata Consultancy at a rate of 13.7 percent in the quarter ended Sept. 30, a decrease from 14.1 percent for the same period last year. Infosys reported employee attrition of 15.6 percent for the period.

As software vendors compete to win and retain the best workers, wages across the industry are rising, creating a new source of pressure on profit margins. Tata Consultancy said in April that it would raise salaries for its workers in India by 12 percent to 14 percent in the year ending March 31, while Infosys said it would raise wages by 10 percent to 12 percent.

The Commercial Bank of Qatar, the country’s second-biggest lender, today said it signed a 5-year agreement with Tata Consultancy for outsourcing back office and information technology services.

--Editors: Suresh Seshadri, David Merritt.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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