U.S. Shutdown to Hit Tata Consultancy Earnings: Corporate India

Tata Consultancy Services Ltd. (TCS), Asia’s largest software exporter by market value, forecasts “softness” in third-quarter earnings as U.S. contracts are hurt by the government shutdown.

Clients will defer portions of contracts into January amid the 16-day shutdown, Chief Financial Officer Rajesh Gopinathan said in an interview. While technology companies typically trim operations in December, the shutdown may force the practice to spread, he said before Congress voted today to end the impasse.

Lockheed Martin Corp. (LMT) and Computer Sciences Corp. (CSC), companies that rely on U.S. government contracts, are among employers that used temporary layoffs of workers during the shutdown. The closing could extend the impact across the software and consulting industry if non-government clients delayed spending on contracts and services, said Anurag Rana, a New York-based analyst with Bloomberg Industries.

“People freeze and stop spending when the government shuts down. No one is immune,” Rana said.

The company this week beat analyst estimates, posting a profit of 47 billion rupees ($761 million) in the three months through September. Larger rival Accenture Plc (ACN) in September forecast earnings may fall short of expectations.

North America

For the current quarter, net income is forecast at 46.5 billion rupees, a 32 percent increase from a year earlier and a 1 percent decline from the September quarter, according to the median of six analyst estimates compiled by Bloomberg.

North America accounted for 53.2 percent of Tata Consultancy’s revenue in the September quarter, compared with 53.8 percent a year ago, according to a company statement on Oct. 15. That share may continue to slide as European economies show signs of recovery, yielding an increase in the region’s share of revenue.

The House of Representatives approved a measure passed by the Senate to raise the U.S. debt limit and end the shutdown. Senators voted 81-18 in favor of the move and the House supported the move by 285 votes to 144 votes. President Barack Obama supports the agreement.

Tata Consultancy shares were poised for the biggest loss in a month, dropping 2.6 percent to 2,158.15 rupees as of 9:39 a.m. in Mumbai. The stock has surged 72 percent this year, compared with a 5.4 percent gain in the benchmark S&P BSE Sensex index. India’s markets were closed yesterday for a public holiday.

The Mumbai-based company has diversified sources of revenue to mitigate the impact of unforeseen economic and political scenarios, Gopinathan said.

Meager Growth

Growth in the third quarter ending Dec. 31 is typically meager and the shutdown will probably exacerbate that trend, Gopinathan said.

“It’s normal practice for work on projects to be suspended during the last few weeks of the year,” he said by phone from Mumbai. “That may happen again this year, but with more shutdowns spread across other industries.”

Tata Consultancy is continuing to evaluate acquisition targets in Europe, he said, without elaborating on which country or how much it would spend. The company completed its acquisition of France’s Alti SA in July.

While the shutdown has crimped U.S. growth, the company may seek to provide IT services in the nation’s health-care industry.

Untapped Market

The sputtering start to President Barack Obama’s health-care exchanges may lead to “very, very big” spending on information services over the next five to 10 years, Gopinathan said.

“We have fairly aggressive plans for America’s health-care industry and are exploring all forms of participation,” he said, without ruling out an acquisition to promote their position. “We have never shied away from taking a leadership role, especially in such a hugely untapped market.”

Expansion in health care may bolster Tata Consultancy’s position as India’s leading outsourcing company, which saw margins improve to 30.2 percent from 26.8 percent, including a 300 basis points surge, thanks to India’s depreciating rupee, Chief Executive Officer N. Chandrasekaran told reporters in Mumbai on Oct. 15. The currency declined 5.2 percent against the dollar in the July-September period.

“These are superb results,” Urmil Shah, a Mumbai-based analyst with Kim Eng Securities Ltd said after the company reported its second-quarter earnings. “TCS is just winning more large deals than their biggest competition. They’ve diversified their efforts and are growing across industry verticals.”

New Normal

The company is waiting for the rupee to stabilize before determining if levels of 61 to 62 rupees per dollar are “the new normal,” Gopinathan said. Sales climbed 34 percent to 209.8 billion rupees. That compared with the 207.7 billion-rupee median estimate compiled by Bloomberg.

Worldwide spending on information technology services is forecast to grow 3.4 percent this year, researcher IDC said on Aug. 5, lowering its earlier estimate for 3.8 percent growth.

That spending is likely to slow for at least a quarter because of the impasse, Rana said.

“Right now, contracts are priced to perfection,” he said. “This kind of a hiccup in economic stability could very well take its toll.”

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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