TCS results underwhelm as it kicks off earnings season
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Mumbai: Tata Consultancy Services Ltd’s (TCS) quarterly dollar revenue rose 3.1% from the preceding three months, matching depressed expectations, even as profitability narrowed sharply, underlining the structural challenges faced by the Indian software services industry.
The April-June period marks the 11th straight quarter when India’s largest software services company has either underperformed, or at best managed to match analysts estimates.
Worryingly for the Mumbai-based company, a slowdown in hiring has emerged as another challenge, along with slow growth and declining profitability, making many question the future of India’s $154 billion outsourcing industry.
TCS saw a net decline in its workforce for the first time since 2010. The company’s workforce declined by 1,414 people to 385,809 employees at the end of June, as against 387,223 at the end of the previous quarter.
TCS’s dollar revenue increased 3.1% (2% in constant currency terms) to $4.59 billion in the quarter ended June from the preceding three months, thanks to a 6% constant currency growth in Europe, which accounts for a little over a fourth of the company’s revenue.
Revenue in dollar terms rose 5.2% from a year earlier. Net profit declined 7% to $923 million in the June quarter from $992 million in the preceding three months.
Operating margin contracted 236 basis points to 23.4% from the January-March period.
The management attributed the decline to a 150 basis points hit on account of higher salaries and an additional 80 basis points drop because of adverse currency fluctuations.
One basis point is one-hundredth of a percentage point.
In rupee terms, the company’s revenue declined 0.2% to Rs29,584 crore, while profit declined 10% to Rs5,945 crore.
A Bloomberg survey of 20 analysts had estimated profit to come in at Rs6,203.50 crore ($962.16 million) on net sales of Rs29,571 crore ($4.59 billion).
TCS does not give quarterly or annual forecasts. Analysts are sceptical about the company’s prospects.
“For over two years TCS has disappointed the Street on revenue growth and on profitability. So in the run-up to the first quarter, the expectations were already low. Even with these lowered expectations, TCS’s performance is again a tad weak or marginally negative,” a Mumbai-based analyst at a domestic brokerage said on condition of anonymity.
“The management has said it has not seen any change in demand from clients in BFSI (banking, financial services and insurance) and RCPG (retail and consumer packaged goods) from the April period. These two industries account for 46% of revenue. So TCS will find it difficult to even better its performance of last year.”
“Revenues shade light of expectations, but margin miss significant,” HSBC analyst Yogesh Aggarwal wrote in the first note to clients after the company reported its earnings.
Despite the weak show, the management put up a brave face.
“In a challenging operating environment, we have had a fairly steady performance,” said Rajesh Gopinathan, who completed his first-full quarter as chief executive of TCS, after taking over in February from N. Chandrasekaran, who is now the current chairman of Tata Sons Ltd.
“We remain optimistic,” said Gopinathan when asked about the outlook for the remaining year.
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. The BFSI segment, which accounts for over 33% of its revenue, grew 5.1% from a year earlier in constant currency terms. North America, which brings 52.5% of its business, reported a 3.5% rise.
This under-performance is primarily because most Fortune 1000 companies are looking at newer solution offerings, such as in areas of data analytics, from their IT vendors even as homegrown technology giants have been late to invest in newer technologies dubbed as digital.
TCS claims its digital revenue grew 7.6% sequentially and 26% from the year-ago period to $867.7 million or 18.9% of its quarterly revenue.
On Thursday, TCS shares rose 0.2% to Rs2,444.05 on the BSE, while the benchmark Sensex gained 0.73% to 32,037.38 points. The earnings were announced after the end of trading in Mumbai.