Stock Review: TATA CONSULTANCY SERVICES

The sales and profit growth reported by Tata Consultancy Services (TCS) for the March 2011 quarter was more or less in line with the Street's expectations. Its stock, however, fell by over 2% on Thursday in an otherwise bullish broader market on account of lower than expected momentum in its quarterly business volume.

The country's largest IT exporter reported far better performance than Infosys, the second in order, sequentially as well as annually. HCL Technologies — the fourth in rank, which declared results on Wednesday — has also surpassed Infosys in terms of growth momentum. What this means is even though global demand scenario looks firm, it will benefit those players most who have invested in expanding reach and improving deliverables in the past.

So far, TCS has been the biggest beneficiary of the rebound in outsourcing demand. Over the last five quarters, it has garnered the biggest share of incremental revenue when compared with Infosys and HCL Tech (see graph). TCS contributed more than 40% to the aggregate incremental revenue on trailing 12-month basis in each of the five quarters ended March 2011. Further, the share has gradually expanded in each quarter to as much as 48% for the March quarter, which means TCS now accounts for nearly half of the additional revenue that the sample companies garner in a year.

TCS has also emerged as the most profitable among the three. For the March 2011 quarter, TCS earned 33% operating margin on its incremental revenue in the last 12 months; it was 15% for Infosys and just 1.3% for HCL Tech, which has been striving hard to improve margins.

However, the margin is fast declining. It almost halved when compared to the year-ago figure of 61%. While this reflects the impact of escalated wage bill during the said period, it may also hint at the possibility that the company is finding it difficult to increase billing rates to fully compensate for salary increases. The broader outlook remains robust as reflected from the proposed headcount addition by the sample companies. TCS and Infosys together expect to add over a lakh employees in FY12.