TCS reports 3.2% sequential rise in Q2 dollar revenue
Bengaluru: Tata Consultancy Services Ltd (TCS)’s quarterly revenue rose 1.7% in constant currency terms in the second quarter from the preceding three months, lower than already depressed expectations, but a 150 basis point boost from positive currency movement and better operational efficiency helped the company report a 3.2% sequential increase in dollar revenue, allowing it to beat analysts’ expectations in the July-September period.
Nonetheless, it marks the 12th straight quarter when India’s largest software services company has either underperformed or at best managed to match analysts’ estimates in constant currency terms.
One reason for this prolonged underperformance is its current size. TCS, which ended the September quarter with $4.74 billion revenue, now does more business in a three-month period than Tech Mahindra Ltd, India’s fifth largest IT services firm, did in 2016-17.
Still, a subdued performance in what is seasonally the strongest quarter for India’s $154 billion outsourcing industry masks the optimism expressed by the management of TCS, as there are plenty of worries ahead for the company and for the industry.
A 3.2% growth on the back of 3.1% in the first quarter means TCS added $594 million in incremental revenue in April-September, higher than the $544 million in new business in the same period of the last fiscal year. TCS added $1.03 billion in new revenue in 2016-17 to report a 6.2% growth.
In the current fiscal year, the firm needs to add $1.09 billion in incremental revenue to match that pace. This means TCS will have to repeat its improved performance in the first half of the year in the coming six months for it needs to add $496 million in incremental revenue in the second half of the year, compared to $486 million in October-March last year.
In the September quarter, the company reported dollar revenue of $4.74 billion, a 3.2% rise from the preceding three months and up 8.3% from the year-ago period.
In rupee terms, second-quarter revenue improved 3.2% to Rs30,541 crore from the preceding three months. TCS’s quarterly profit rose 8.4% sequentially to $1 billion, up 1.6% from $984 million in the year-ago period.
TCS improved its operating margin by 170 basis points sequentially to 25.1% from 23.4% in the April-June period but was 90 basis points narrower than 26% at the end of year-ago period. A basis point is one-hundredth of a percentage point.
A Bloomberg survey of analysts had estimated the company to report Rs6,283.5 crore ($961.36 million) profit on net sales of Rs30,501.6 crore ($4.667 billion).
“TCS delivered a relatively strong Q2,” said Rajesh Gopinathan, who took over as chief executive officer in February after N. Chandrasekaran was appointed chairman of Tata Sons Ltd. “Overall from financial performance perspective, it has been a very satisfying quarter considering the operating environment we are in.”
TCS’s performance in the second quarter, coming on the back of a 3.1% growth in the first quarter, was driven largely by a 5.3% constant currency rise in revenue from clients in continental Europe, which brings about 12.5% of total revenue.
Some of the company’s other smaller industry-serving units did well too: travel and hospitality saw an 8% sequential jump, while energy and utilities saw a 7.2% rise. Both these divisions accounted for 8% of TCS’s overall revenue.
But that was not enough consolation for analysts.
“In your seasonally strongest quarter, TCS managed only a 1.7% sequential constant currency growth. This shows that something is not right and the company is struggling. Yet, the management remains bullish. Now, how much more can the company grow in the second half of the year, should again tell you if there is any merit to believe in the management’s optimism,” said a Mumbai-based analyst at a foreign brokerage, on condition of anonymity.
The challenges ahead for TCS include the weak performance in the US and soft demand from clients in the banking, financial services and insurance (BFSI) space.
The US, which accounted for 51.9% of TCS’s second quarter revenue, reported a 1.4% growth over the June quarter, and a 3.6% growth from the year-ago period. BFSI, which accounted for a third of TCS’s revenue, reported a 1.9% sequential constant currency growth and just 4.7% growth from the year-ago period.
Some others fretted about the weakness plaguing its all-important BFSI arm.
“Rajesh (Gopinathan) continues to claim that the company’s BFS in Europe did well. So, does this mean that US BFSI reported no growth or at-best marginal improvement? 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 who also declined to be named.
The company’s workforce increased by 3,404 people to 389,213 employees at the end of September, after declining by 1,414 in the June quarter.