Tata Consultancy Services’ Strong Performance a Positive Sign for India’s IT Outsourcing Services

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By Ian Bhullar

Jul. 18 – The strong performance of Tata Consultancy Services (TCS) in the three months up to June, reported last week, are an indication of the continued potential of Indian IT outsourcing services in spite of adverse market conditions in the United States and Europe.

TCS recorded a net profit of INR32.8 billion from March to June, and revenue of INR148.7 billion, up 37.7 percent from a year ago. Over the last four quarters, the company has recorded steady volume growth of 3.3, 3.2, 6.3 and 7.4 percent respectively.

HCL Technologies, a key competitor to TCS, has similarly reported strong growth. However, industry leader Infosys has cut its annual sales growth forecast to 5 percent, down from a previous estimate of 8 percent to 10 percent. Despite a rise in net profit in this quarter compared to the same quarter last year (INR22.9 billion from INR17.2 billion), Infosys’s shares have fallen 8 percent in response to its lagging growth rate.

Demand in both Western Europe and the United States, compromised by continued economic woes, has led to a pricing squeeze for outsourcing services. Infosys has reported a 3.7 percent drop in prices, and TCS a 1 percent drop.

“We are seeing sporadic pricing renegotiation and some demands for discounts,” says S D Shibulal, CEO and MD of Infosys.

For Infosys in particular, shrinking consumer demand is problematic since 30 percent of its revenues come from consulting and system integration works, sectors with much higher dependence on one-off discretionary spending. Such spending tends to be withheld by budget-constrained firms in troubled economic times.

This pressure on revenues is compounded by increasing political opposition to IT outsourcing in consuming countries, an increasingly salient issue as the United States approaches election time.

Meanwhile, TCS’s strength can be attributed to at least three factors.

First, a weak rupee has assisted all exporting Indian firms by lowering the price for services abroad, and increasing the value of repatriated foreign earnings.

Second, TCS’s business model, especially its diversification of industries and functions, has enabled it to weather the uncertain economic climate. The company’s growth was led by a combination of business process outsourcing, enterprise solutions and infrastructure services, across retail, telecom and banking and financial services.

“For us, growth will be broad-based and that is what we wanted. For us, it is not about one sector,” TCS MD and CEO, N Chandrasekaran, said in an interview published in the Business Standard.

This has been particularly important in setting TCS apart from Infosys. The latter undertook a shift to increase consulting functions amid the Global Financial Crisis, and had not fully consolidated its restructuring before the economy fell for the second time.

By contrast, TCS is reported to have executed a successful restructuring during its CEO handover from S Ramadorai to N Chandrasekaran, limiting any negative impact on client sentiments.

TCS has also maintained a reputation as a flexible company that gives its clients a high level of control over budgets, thus increasing cost predictability for business leaders keeping a close eye on their bottom lines.

Lastly, compared to Infosys, TCS has a wider geographic spread – especially into areas such as Latin America, one of its core sales regions, and China. Whereas the United States and Europe account for 86 percent of Infosys’s revenue, they account for 80 percent of TCS’s. This small gap may make a large difference to the firms’ respective sustainability.

“TCS has a better presence in emerging markets and that might have helped it weather the downturn more effectively,” says IT analyst with Angel Broking, Ankita Somany.

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