What made TCS tick in the April – June 2009 quarter results?

Though TCS is the number one Indian IT company in terms of revenues, it often gets a poor treatment from the stock market compared to its rival Infosys, who is a darling of the stocks. Probably that’s why the markets were surprised to see good results from TCS, especially improvements in its operating margin and hence the profits. The stock market responded by saluting the IT behemoth with a 15% increase in it stock price, the highest for the company in the past one year. Below is a snapshot of the TCS results for the Apr-Jun09 quarter.

Net profit – quarter on quarter growth - +15% to Rs.1534 crore

Revenue – quarter on quarter growth - +0.5% to Rs. 7,207 crore.

You will notice that though the revenue has increased marginally, the profit has increased in double digits. This shows that TCS has implemented huge cost saving measures for bolstering up its operating margin and hence its profits. TCS is known for its lower operating margins compared to Infosys, a factor that results in Infosys showing healthier profits than TCS, even though TCS’ revenue may be higher. It looks like TCS has finally decided to take a hard look at its costs and is tightening its belt in these times of slowdown. It has reported cutting down on major costs like selling and administrative expenses and lowering of costs due to moving work offshore. Many TCSers will vouch for this as they have been facing the brunt of the massive cost cutting exercise taken up by the management.

Another factor that has helped TCS perform well in this quarter is reduced forex losses compared to last quarter. So, forex losses were brought down to Rs 84.1 crore from Rs 781 crore in the last quarter. TCS has also improved it revenue collection mechanism and has brought down the number of receivable days to 75, down from 86 a year ago. TCS customers include trouble auto companies like General Motor, Chrysler and investment banks like Lehman Brothers. Recovering receivables from such companies seem to have helped.

The rise in profit and operating margins maybe good news, but the company faces tough road ahead to increase its revenues. It has added only 26 clients in this quarter, down from 36 clients in last quarter and the total number of clients has also come down. So while this quarter may have fared well for TCS, the road ahead does not look smooth enough.