Tata Consultancy Services Did A 'Commendable' Job Of Arresting Employee Attrition: Report

Tata Consultancy Services (TCS), India's biggest outsourcer, missed the Street's revenue estimate but its profit exceeded expectations. 

TCS reported a better-than-expected net profit of Rs 6,586 crore in the three months ending September 30, on revenues of Rs 29,284 crore, which was below the Street's estimates.  

A strong 94-basis-point improvement in operating margin to 26 per cent in the second quarter lead to the profit beat, which was aided by a fall in attrition levels and higher operational efficiency, say analysts.   

"TCS surprised positively on margin yet again with operational efficiency absorbing the 40 basis point exchange fluctuation impact. It did a commendable job of arresting attrition-fell to low of 11.9 per cent for IT services," Edelweiss Securities said in a report. 

Edelweiss Securities also believes that lower attrition will aid Tata Consultancy Services' margin in coming quarters. 

"The company's attrition declined 60 basis points in Q2FY17. This, we believe, along with higher utilisation and lower replacement cost, will potentially aid margin in coming quarters, Edelweiss Securities said."

"We also believe that lower attrition reduces the risk of execution delays and enables execution excellence, which ultimately flows to the bottom line," it added. 

TCS management has maintained its margin guidance range of 26-28 per cent for the year and expects "Q3 and Q4 this year will be better than the usual years". 

However, Edelweiss Securities says that "while we are enthused by fall in attrition, the policy of lower visa applications implies higher local hires or sub-contractors, thereby limited margin upside".

Edelweiss Securities has a "hold" rating on TCS shares with a target of Rs 2,320. On Friday, TCS shares ended 1.60 per cent higher at Rs 2,365.90 apiece on the BSE, whose benchmark Sensex index finished up 0.11 per cent.