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Rediff News  All News  » Business » TCS' operating margin set to slip 25 bps on suit payout

TCS' operating margin set to slip 25 bps on suit payout

March 12, 2013 13:54 IST

TCSIndia's leading information technology services provider Tata Consultancy Services' operating margin is likely to slip by 25 basis points on the back of a one-time lawsuit settlement of $29.8 million (around Rs 160 crore).

TCS has agreed to pay $29.8 million to settle a suit filed by two of its former employees over unpaid wages.

The impact of which could be around 100 basis points on the company's margins, said an analyst.

“The Ebit (earnings before interest and taxes) margin should meet the company’s target of 27 per cent for FY13.

"We model 26.9 per cent margin in Q4FY13 (which implies 27.1 per cent Ebit margin for FY2013), a decline of 25 basis points quarter-on-quarter on the back of a one-time lawsuit settlement of $29.75 million,” says a report from Angel Broking.

In a recent analyst meet with the company’s management, which was hosted by chief financial officer Rajesh Gopinathan, the company pointed out that the management remained confident of a higher dollar revenue growth in FY14 than in FY13, at relatively stable margins.

Analysts across brokerage houses stated that TCS was well on track to meet its FY13 growth plans, which it had indicated to be better than the industry average.

"The management noted TCS should end FY13 in line with its target set at the start of the year.

"We believe the company is on track for 3-3.5 per cent constant-currency revenue growth in 4Q, i.e., a pace similar to that in Q3. Cross-currency movements could, however, shave 0.3-0.6 percentage points from dollar revenue growth, by our calculations," said Abhiram Eleswarapu of BNP Paribas in his report.

The management also said that pricing was expected to remain stable and growth was

expected to be driven by volumes in the quarter.

“We model in 3.2 per cent growth in Q4FY13 on a quarter-on-quarter basis. As per our estimates, revenues in FY13 should grow 15.8 per cent, well above 13.8 per cent in reported currency and above the upper end of the Nasscom’s earlier guidance of 11-14 per cent,” said Ankita Somani of Angel Broking in her report.

The company management sounded confident of FY2014 being better than FY2013 as clients seem to have a better handle on the kind of projects they want to execute and have made plans to spend on IT considering all the challenges.

Healthy pipeline, broad-based deal signings and upturn in discretionary spending, all these factors have collectively lend confidence to the company’s outlook for FY14.

The US is seeing broad-based optimism.

Better outlook in the US is driven by some uptick in discretionary spending, where the demand is more project-centric.

Also, the management expects that with the political environment improving, the visa regime should get more benign. In Europe, while the broader economy remains weak, there is increasingly greater acceptance of the outsourcing model and the nature of work is largely skewed towards traditional services.

In Q4FY13, if the currency remains range bound, TCS expects to see an estimated forex gain of Rs 75 crore or Rs 750 million (as against a forex loss of Rs 73 crore or Rs 730 million in Q3FY13), which would boost the reported net profit.

The company has not taken a call on wage hikes yet. It will wait till the end of the quarter before finalising the same.

Overall, demand optimism remains intact with few pockets of weakness like telecom and hi-tech. The company expects the banking, financial services and insurance business to grow in line with the company average going ahead.

BS Reporter in Bengaluru