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Nachiket Kelkar
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TCS may find it difficult to meet margin targets in FY18: Analysts

INDIA-ECONOMY-IT-TCS-COMPANY TCS CEO and MD Rajesh Gopinathan | AFP

Company fails to meet analysts' estimates on back of pressures in banking and financial services and retail verticals

The January-March quarter was a disappointing one for Tata Consultancy Services (TCS) with the company missing analysts' earnings expectations on the back of pressures in banking and financial services and retail verticals. Despite the challenges, the country's largest software services exporter reiterated its intention to maintain EBIT (earnings before interest, taxes) margins in the 26-28 per cent band. However, analysts remain skeptical, particularly given the strong appreciation of the rupee against the US dollar.

"Translation of optimism among BFSI clients is taking longer than expected, resulting in zero to one per cent cut in our revenue estimates. Achieving internal margin band of 26-28 per cent against the backdrop of rupee appreciation is a challenge," said Kawaljeet Saluja, analyst at Kotak Institutional Equities.

TCS' operating margins in the fourth quarter as well as for the year ended March 31, stood at 25.7 per cent, down from 26.5 per cent in the year-ago period. 

Rajesh Gopinathan, MD and CEO of TCS, tried to justify the company sticking to its guidance, saying there were several levers that would benefit margins ahead.

"We see continuing growth and size and critical mass in digital that has an improving margin profile, as we add size there... We have expectations from driving better productivity. As I said, we expect to be throttling back on our net additions during the course of this year as we drive that productivity over there. And then, we expect to see some of the underperforming segments do better year-on-year," Gopinathan said in a post-earnings conference call with analysts. 

However, according to a few analysts, measures such as increasing productivity and reducing hirings are not sufficient enough. 

"Given that attrition at TCS is very benign at 10.5 per cent for IT services, it can afford to work on various supply side measures around differential wage hikes, variable compensation and lower hiring to manage margins better than peers. Yet, we believe it will be difficult for TCS to sustain margins in FY18 even at the lower end of the targeted range," said analysts at broking firm ICICI Securities. 

Broking firm Motilal Oswal expects TCS' margins to contract 50 basis points in the current financial year to around 25.2 per cent.

Overall, TCS reported a 4.2 per cent year-on-year rise (2.5 per cent quarter-on-quarter drop) in net profit at Rs 6,608 crore. It was slightly lower than analysts expectation of Rs 6,662 crore, according to Thomson Reuters data. The company's revenue for the January-March quarter stood at Rs 29,642 crore, up 4.2 per cent during the corresponding period last year (down 0.3 per cent sequentially).

The company flagged off cyclical pressures in banking and financial services and more structural challenges in retail sector for the lower-than-expected performance.

Furthermore, there are also growing H1-B visa pressures in the US, and the company said it will step up local hiring. This could also weigh on margins.

TCS' gross hiring in FY17 moderated to about 78,900, compared to 90,200 in the previous fiscal. Company officials said on Tuesday that gross hiring will be lower this year too. Overseas, the company hired about 11,500 employees, including from engineering campuses and top ten business schools in the US.

US President Donald Trump signed an executive order on Tuesday, directing federal agencies to review the existing employment immigration laws and promoting more local hiring.

Currently, around 65,000 H1-B work visas are granted by the US each year, bulk of them going to technology companies in India like TCS, Infosys and even to US-based rivals like IBM and Cognizant. Since the applications far outstrip supply, the visas are typically granted on a lottery system. Trump is more in favour of granting visas to high-skilled and highly paid workers, rather than a random lottery.

Both TCS and Infosys have said they will increase local hiring to remain compliant.

Ajoy Mukherjee, global head of human resources at TCS said apart from local hiring, the company will also use other levers like automation and offshore services to counter the rising policy headwinds in the US.

Analysts said there was a need to closely monitor margins in the backdrop of the immigration headwinds. 

On Wednesday, TCS shares are trading 0.6 per cent lower at Rs 2,295.40 on the BSE in intra-day trading.

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