OVUM Samad Masood

European revenue grew 82% to $315m (€237m) on a 30% margin, compared to 33% growth for the Americas to $212m (€160m) on a 34% margin. The UK grew 90% to $221m (€166m) and accounted for 20% of revenue. Continental Europe grew 64% to $93m (€70m).

Comment:

Once again TCS has stolen the limelight from rival Infosys, practically halting its margin decline and growing faster than Infosys in terms of revenue added year-on-year. Yes, Infosys remains the most profitable of the leading Indian firms (with 29% margins in Q3), thanks to its focus on application services that enables a higher proportion of time and materials work and offshore delivery. But TCS is now benefiting from its earlier investments in new global markets and new services, which give it more growth engines than application services alone.

This means that TCS has now been able to sign larger 'full service' deals combining software, IT services and BPO in Latin America and the UK (with Pearl Group), as well as sign a large infrastructure deal with Somerfield in the UK, and a large software and IT services deal with a Chinese banking client. These deals are helping to drive higher prices and more strategic client relationships.

Meanwhile, Tata's reputation back home gives TCS a significant advantage in India where competition for labour continues to challenge profitability for all global IT services vendors. TCS's attrition rate of 10.8% is the lowest in the industry, and growing slower than Infosys', which is 2.7% points higher. And this is despite adding 70% more staff to its payroll than Infosys did this quarter.

But while TCS's push into new markets and services is helping it build a broader-based business with better growth, it also faces more risks of being pulled in too many directions at once - particularly by its move into the BPO market, which requires a very different business mindset and approach to that of IT services. For instance, the BPO transformation work at Pearl has so far resulted in single-digit profit margins from the relationship. Given that the transformation is expected to go on for four years, this could continue to have a dilutive effect on TCS's overall margin for a while.

TCS's management have proved that they have what it takes to get this far, managing some spectacular growth. But the next phase of TCS's evolution will have new challenges in new markets such as Continental Europe and new services such as BPO - challenges that most leading Western IT services players have yet to overcome.