TCS Q3 profit rises 8% to $1 billion, beats forecasts

Tata Consultancy Services’s revenue in dollar terms grew 0.3%, sequentially, and increased 5.8% from a year ago


TCS’s quarterly profit rose 1.6% sequentially to $1 billion, up 8% from $926 million in the year-ago period. Photo: Mint
TCS’s quarterly profit rose 1.6% sequentially to $1 billion, up 8% from $926 million in the year-ago period. Photo: Mint

Bengaluru: At Tata Consultancy Services Ltd (TCS), the protracted period of subpar growth continued as India’s largest technology outsourcing firm reported a 0.3% dollar revenue growth, marginally higher than Street expectations, in the October-December period.

TCS, which ended with $16.5 billion in revenue last year, has grown more than 3% on a sequential basis in a quarter only three times since October 2014. Worryingly, over these past nine quarters, it last reported an over 10% year-on-year growth only once, in the January-March 2015 period.

Mumbai-based TCS saw a 0.3% rise in dollar revenue from the preceding three months, and was up 5.8% from the year-ago period to $4.379 billion in the quarter to December. In rupee terms, third-quarter revenue rose 1.5% to Rs29,735 crore from the preceding three months. In constant currency terms, TCS reported a 2% growth, on account of generating more business from its banking clients in the US.

TCS’s quarterly profit rose 1.6% sequentially to $1 billion, up 8% from $926 million in the year-ago period.

A Bloomberg survey of analysts had estimated the firm to report Rs6,432 crore ($947.49 million) profit on net sales of 29610.5 crore ($4.36 billion).

The company’s operating margin was 26%, similar to what it was at the end of the July-September period. The management reiterated its commitment to end the year in its stated guidance of 26-28% operating margin.

“It was a very good quarter, considering traditionally Q3 has a weak demand,” said Natarajan Chandrasekaran, chief executive officer, TCS, who is set to take over as chairman of holding company Tata Sons on 21 February. “I don’t expect Q4 to be anything different than in the past. As of now, based on what information I have, I believe it (Q4) should be on expected lines.”

Chandrasekaran downplayed concerns over a clamp down on H-1B visas, critical to software firms such as TCS, in the context of the new administration in the US and said the company is well prepared to cope with any increase in wages for its US employees or a lowering of the visa ceiling.

“I cannot comment on the margin impact; but since 2015, we have been preparing ourselves to work in a visa-constrained environment. So I don’t think there will be any impact on us,” said Chandrasekaran.

Earlier this month, a legislation demanding that outsourcing firms pay at least $100,000 a year to employees who work in the US was introduced in the US Congress.

TCS does not give a quarterly or yearly guidance, and the company’s underperformance in the nine months of the current year means it will at-best report a 6% dollar revenue growth, lower than the 7.1% growth reported last year.

TCS has added $786 million in incremental revenue from April to December this year against $783 million in new business in the first nine months of 2015-16. Significantly, for the first time since TCS went public in 2004, its annual growth will be less than or at best on par with Accenture Plc., which is double the size of the Mumbai-based firm. Accenture grew 6% in the year to August last year (Accenture follows September-August as financial year), helped by 15 acquisitions , which brought 2 percentage points of overall 10.5% constant currency growth. TCS has shied away from buying companies.

“It is status quo—nothing materially different than the second quarter. It is important to note that expectations are already so low that even if the company meets the low end of these expectations, it is considered to be a decent show,” said a Mumbai-based analyst at a domestic brokerage, on condition of anonymity.

At the heart of TCS’s underperformance is its inability to build a stronger consulting practice and the management’s reluctance to buy small hi-tech firms. TCS also faces some client-specific challenges. Nonetheless, TCS said its digital business in the third quarter rose 6.6% on a sequential basis and 30.2% over the year-ago period to $737 million, or 16.8% of its quarterly revenue.

Its revenue from banking, financial services and insurance firms, which accounts for 40% of total revenue, reported a 2.1% increase in constant currency terms. TCS reported a 2.2% improvement in the US, which accounts for 55% of total revenue. Revenue growth in the UK, which brings about 13.3% of total business, rose 1.7%, while the India business, which brings about 6.3% of revenue, jumped 10.3%.

TCS managed to retain more employees in the quarter, as attrition for IT services stood at 11.3% and including back office unit (BPO business), attrition was 12.2%.

Shares of TCS rose 0.87% to Rs2,343 on BSE on Thursday, while the benchmark Sensex rose 0.39% to 27, 247 points.

The results were disclosed after the markets closed.

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