TCS worries analysts with Q2 revenue miss
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Bengaluru: Tata Consultancy Services Ltd reported weaker-than-expected revenue in what has typically been a strong quarter for the company, raising concerns about growth in the rest of the year for both the industry leader and the larger $150 billion information technology (IT) sector.
The poor performance means the industry leader now runs the risk of growing at less than 7.1%, which was the slowest annual growth at TCS since 2009, when Natarajan Chandrasekaran took charge as its chief executive.
“While TCS has been missing revenue growth expectations for multiple quarters now, the miss in the second quarter is significant, particularly for the seasonally best quarter,” HSBC analyst Yogesh Aggarwal said in a note to clients.
TCS added $544 million in incremental revenue from April to September this year, versus $569 million in new business in the same period last year.
Last month, it warned about weakness in its key banking, financial services and insurance (BFSI) arm last month, citing a “sequential loss of momentum” in the segment that accounts for almost 40% of its revenue after some of its customers cut back on discretionary spending.
TCS added $1.09 billion in new revenue in 2015-16 to report 7.1% growth. For this year, the company needs to add $1.18 billion in incremental revenue to match that pace.
This means it will have to add $636 million in incremental revenue in the second half of the year, which is a tall task considering that most home-grown information technology vendors typically do not report any growth or little growth in the second half which includes the year-end holiday season.
Mumbai-based TCS reported 0.3% rise in dollar revenue from the preceding three months, and was up 5.2% from the year-ago period to $4.37 billion in the quarter ended 30 September.
In rupee terms, second-quarter revenue declined 0.1% to Rs29,284 crore from the preceding three months. TCS’s quarterly profit rose 4.7% sequentially to $984 million, up 6.2% from $926 million in the year-ago period.
A Bloomberg survey of analysts had estimated the company to report Rs6,298.9 crore ($947.48 million) profit on net sales of Rs29,739.3 crore ($4.47 billion).
“It has been an unusual Q2 (second quarter) for TCS,” said Chandrasekaran, adding “volatility in markets like India and Latin America also muted revenue growth.”
The management also blamed a delay in getting Rs180 crore from a contract in India for the poor performance. TCS expects to start work on the delayed project in the current October-December period, and also work on some other projects starting in the second half of the year, Chandrasekaran said.
While the company does not give any quarterly or yearly guidance, the CEO expects the second half of the year to be better than the same period last year.
But that was not enough consolation for analysts.
“Even if the company reports a better growth than last year, the fact is that TCS’s year-on-year growth has now fallen to 5.2%. For a company of TCS’s scale, how much more can the management improve in the remaining two quarters? So, it will be a huge task for the management to grow even at 7%,” said a Mumbai-based analyst at a foreign brokerage, on condition of anonymity.
Some others fretted about the weakness plaguing its all-important BFSI arm.
“Chandrasekaran said that UK BFSI did very well. So, this means that US BFSI at best did not report any growth. This is worrying because this means there are multiple banks or clients who for reasons not known are either holding back tech spend or deferring,” said another Mumbai-based analyst at a domestic brokerage.
The trend is worrying not just for the company but for its smaller rivals too, as banks are some of the biggest clients of the $150 billion Indian IT sector.
Worryingly, for the second straight quarter, TCS did not add any new clients, which brings more than $100 million in annual revenue. It currently has 36 clients which bring at least $100 million each in annual revenue.
Chandrasekaran, however, dismissed any concerns of any project cancellations, and said there was nothing structurally wrong behind the slowdown in the BFSI segment.
TCS’s underperformance underscores the challenges faced by the outsourcing sector. Technology vendors are increasingly looking to pivot their business model from deploying an army of engineers to manage computers (and data centres) or write codes for applications for their clients, to offering solutions based on newer technologies such as cloud-computing and artificial intelligence.
TCS started losing momentum in the middle of 2014 and reported six quarters of weak performance before reporting a 3.7% sequential dollar growth in the April-June period.
The company generated less business from US clients and those from the banking and financial services industry.
BFSI, which accounts for 40% of total revenue, reported a 1.2% increase in constant currency terms. TCS reported a 1.4% improvement in the US, which accounts for 54% of total revenue. Revenue growth in the UK, which brings about 13.8% of total business, declined by 0.1%, while the India business, which brings about 5.8% of revenue, declined 7.6%.