TCS misses both revenue and profit estimates in March quarter
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New Delhi: Tata Consultancy Services Ltd (TCS) missed analysts’ estimates for both revenue and profit in the fourth fiscal quarter, even as India’s largest software services firm’s full-year sales rose 6.2% to $17.58 billion.
The company reported revenue of $4.45 billion in the three months ended 31 March, a 1.5% increase from the preceding quarter and 5.8% from the year-ago period. Net profit totalled $992 million, a 0.8% decline on a sequential basis and an increase of 5.8% from the year-ago period.
A Bloomberg survey of 30 analysts had estimated TCS to report quarterly revenue of $4.62 billion and net profit of $1.03 billion in the quarter.
“FY17 was a year of broad-based growth amid economic and political turbulence in our key markets,” said Rajesh Gopinathan, who took over as chief executive of TCS in February. “We believe we are better placed for the year-ahead,” said Gopinathan, who spent much time on the numbers, suggesting that the new CEO will take time to probably replicate the success managed by his predecessor N. Chandrasekaran, the current chairman of Tata Sons Ltd.
At the heart of TCS’s underperformance is the company’s inability to generate more business from its largest customers, banks, in its largest market, the US. TCS’s banking, financial services and insurance (BFSI) segment, which accounts for over 40% of its revenue, grew 4.8% from a year earlier in constant currency terms. North America, which brings 54% of its business, reported a 4.3% rise.
TCS does not give quarterly or annual forecasts but a few equity analysts are sceptical about the company’s prospects.
The January-March quarter marks the 10th straight quarter (the company has recorded slow growth since July 2014) in which TCS has either underperformed, or at best managed to keep up with estimates.
“Looking at this protracted slowdown, I believe TCS has reached a point where unless the company really brings about a change in the way it has done business, it will be tough for the company to ever beat street expectations,” said a Mumbai-based analyst at a domestic brokerage, on the condition of anonymity. “At best it can match street expectations.”
TCS’s performance mirrors the poor show put up by Infosys Ltd last week, and this is worrying for three reasons.
First, both growth and profitability for Indian IT firms is under pressure. Mumbai-based TCS reported a full-year increase of 8.3% in constant currency terms, similar to the full-year growth reported by Bengaluru-based Infosys (with $10.21 billion in revenue) although Infosys reported a higher 7.4% expansion in dollar revenue.
Like Infosys, TCS’s growth in 2016-17 was slower than in 2015-16: TCS’s revenue growth in constant currency terms was 3.6 percentage points slower than the 11.9% increase in 2015-16. TCS added $1.03 billion in incremental revenue in the year ended 31 March 2017, less than $1.09 billion added in new business in 2015-16 when it reported a 7.1% increase and half of the $2.01 billion in new business added in 2014-15.
TCS’s operating margin in the January-March quarter and for the full year stood at 25.7%. Operating margin narrowed 80 basis points from 26.5% in 2015-16, again similar to Infosys, which too saw its profitability eroded as commoditized outsourcing contracts see intense pricing pressure.
Despite falling short of its operating margin forecast of 26-28% in the last financial year, the company’s management retained this guidance for the current fiscal year, which at least two analysts say will be “impossible to achieve”.
“In this kind of environment, where most companies want more skilled people at client-facing sides, when most countries are adopting a protectionist stance, it looks impossible to keep operating in that band,” a Mumbai-based analyst at a foreign brokerage said, requesting anonymity.
Second, despite higher growth in digital, which remains a fuzzy word, and the success of new and renew strategy rolled out by CEO Vishal Sikka to revive Infosys, both companies continue to be plagued by anaemic growth.
This has made many analysts question if existing traditional contracts are merely getting rebadged as digital.
A case in point: TCS claims its digital business grew 29% in the last year and now brings $3 billion in business.
Finally, both TCS and Infosys continue to shy away from acquiring technology-focused firms. Infosys has not made a single acquisition in the last 18 months; TCS has looked away from acquiring a company since it partnered with Japan’s Mitsubishi Group in 2014. This is important because most large technology firms, including Accenture Plc, are looking at acquisitions to bring in new technology and skill sets.
Nevertheless, the quarter does have some positives.
For starters, the TCS management claimed that its insurance business under Diligenta and Japan has turned the corner, with Gopinathan expressing confidence of growth from these two lagging business units.
On Tuesday, TCS shares fell 0.53% to Rs2,308.65 on BSE, while the benchmark Sensex declined 0.32% to 29,319.1 points. The results were announced after the end of trading in Mumbai.