Tata Consultancy Net Lags Estimates as Clients Curb Spending
October 18, 2011, 1:19 AM EDTBy Ketaki Gokhale and Anoop Agrawal
(Updates share price in fifth paragraph)
Oct. 18 (Bloomberg) -- Tata Consultancy Services Ltd., India’s largest software exporter, posted profit that missed analyst estimates for the first time in 10 quarters as a weaker- than-expected economic recovery curbed technology spending.
Net income rose 15 percent to 24.4 billion rupees ($497 million) in the three months ended Sept. 30, Mumbai-based Tata Consultancy said in a statement yesterday. Profit trailed the 25.2 billion rupees median of 28 analysts’ estimates, the first time since the quarter ended March 2009, according to data compiled by Bloomberg.
Tata Consultancy fell the most in a year after Chief Executive Officer N. Chandrasekaran said there was a lot of “negativism” among clients amid economic uncertainty. The recovery in the U.S. still faces “a lot of headwinds” from the sovereign-debt crisis in the euro zone to political gridlock over the budget in the world’s largest economy, according to Bank of Tokyo-Mitsubishi UFJ Ltd. economist Chris Rupkey.
“The recent European turmoil had moderated expectations substantially and TCS missed even those moderated expectations,” Nimish Joshi, an analyst at CLSA Ltd. in Mumbai, wrote in a note to clients yesterday. “Simply put these numbers are not good enough given TCS management’s super-bullish commentary,” wrote Joshi, who rates the stock “underperform.”
Shares of Tata Consultancy slumped as much as 7.9 percent, the most intraday since Oct. 8, 2010, and traded down 7.1 percent at 1,040.55 rupees as of 9:40 a.m. in Mumbai. The stock was the worst performer today on the 30-company benchmark Sensitive Index, which slid 1.5 percent. Infosys Ltd., India’s second-largest software company, declined 1.6 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 yesterday. Still, “we are getting positive vibes from customers in terms of their IT spends going forward,” he said.
The deal pipeline in Europe was still “strong” and the company was currently pursuing two to three telecommunications contracts, Chandrasekaran said yesterday.
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.
Infosys Chief Executive Officer S.D. Shibulal last week said customers were delaying decisions on projects.
“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 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.
Attrition Declines
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.
Tata Consultancy added a net 12,580 employees during the quarter, for a total of 214,770, according to the statement.
Worker exits at Tata Consultancy eased to 13.7 percent in the quarter ended Sept. 30, from 14.1 percent in 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, yesterday said it signed a 5-year agreement with Tata Consultancy for outsourcing back office and information technology services.
--With assistance from Adi Narayan in Mumbai. Editors: Suresh Seshadri, Anand Krishnamoorthy.
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
