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Why no slowdown blues for TCS [Software & Services] [Times of India]
[December 20, 2012]

Why no slowdown blues for TCS [Software & Services] [Times of India]

(Times of India Via Acquire Media NewsEdge) Two years ago, the chief financial officer of India's largest IT exporter, S Mahalingam had said in an interview to The Economic Times that margins were critical for the company's business, but that was not the only focus.

"We have an ideal margin in our mind that suits our business mix. But our aim goes beyond margins. Our focus is on becoming a full services play across the globe," he had said then. TCS had reported a strong operating margin in the preceding quarter which was just a few notches short of Infosys, the most profitable top-tier Indian IT player.

Two years on, TCS has shown not only better margin stability, but also a higher growth in revenue and profits compared to its immediate peers. The storied performance, both in terms of financial numbers as well as stock market returns - the stock has nearly trebled since the beginning of January 2008 when the local equities market touched a new high - reflects the success of its strategy to focus on end-to-end services offerings and to develop a delivery base across key global locations.

TCS is among the few top-tier Indian IT exporters to report strong traction in revenue growth during the last three years against the backdrop of the financial crisis in the West which originated in 2008.

The company's revenues grew at a compounded annual growth rate or CAGR of 22% in the three years to September 2012, faster than that of its peers including Infosys (16% growth) and Wipro (12%). With a tight grip on operating costs including selling and administrative expenses, TCS was able to expand profitability during the period.

Though the company has been clocking an operating margin which is on par or sometimes even better than Infosys, which strives to maintain an industry-best margin profile, it was not always the case. Four years ago, it was operating at a margin of over 22%, much lower than Infosys's 32%. To boost profitability, it took measures to increase the proportion of revenue from high-margin offshore delivery to over 51% from 45% earlier.

Besides, a focus on streamlining operating costs across offices brought down selling costs as a percentage of revenue to about 17% from as high as 22%. These changes helped in boosting operating margins to close to 28%.

It enhanced skills through acquisitions across markets. These initiatives helped in garnering a fair share of the new projects in the post-subprime period. TCS appears to be on a strong footing to weather the current headwinds of slowing demand across western economies and to take advantage of the shifting focus of clients from routine projects to transformational deals that enhance performance in the long run.

(c) 2012 Bennett, Coleman & Company Limited

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