TCS Q1 revenue up, but analysts remain cautious

Despite beating Street expectations, if only marginally, no one is willing to say that TCS has turned the corner

TCS’s dollar revenue increased 3.7% to $4.36 billion in the quarter ended June from the preceding three months. Photo: Mint
TCS’s dollar revenue increased 3.7% to $4.36 billion in the quarter ended June from the preceding three months. Photo: Mint

Tata Consultancy Services Ltd (TCS) reported a 3.7% sequential increase in dollar revenue for the quarter ended 30 June—the highest posted by India’s largest software firm in six quarters.

If analysts are advising caution, it is because the Mumbai-based company, which ended last year with $16.54 billion in revenue, reported a lower 3.1% quarter-on-quarter growth in constant currency terms, meaning its growth improved by 60 basis points on account of currency fluctuations.

So, despite this being the second successive quarter in which TCS beat Street expectations, if only marginally, no one is willing to say that the company has indeed turned the corner.

TCS’s dollar revenue increased 3.7% to $4.36 billion in the quarter ended June from the preceding three months, thanks to 3.8% growth in the UK and 4.6% growth in continental Europe. Together, the two geographies account for 26.3% of the company’s revenue.

The company’s quarterly profit inched up 0.3% sequentially to $940 million from $938 million. In rupee terms, the company’s revenue jumped 3% to Rs.29,305 crore, while profit declined 0.4% to Rs.6,317 crore.

A Bloomberg survey of 29 analysts had estimated profit to come in at Rs.6,063.50 crore ($903.12 million) on net sales of Rs.29,252.8 crore, or $4.36 billion.

“BFSI (banking, financial services and insurance) grew at 1.7%, less than the company’s overall growth. The US, which brings more than half of revenue, reported a 2.5% growth. So it will be early to say if the company has turned the corner,” said a Mumbai-based analyst at a domestic brokerage on condition of anonymity.

“Rather, the big takeaway is company’s profitability because despite wage hikes, TCS’s operating margin came in better than Street expectations”

TCS’s operating margin declined by 98 basis points to 25.1% at the end of June quarter as against 26.3% at the end of April quarter.

Considering the wage hikes, the company’s margin had been expected to take a hit by more than 120 basis points.

One basis point is one-hundredth of a percentage point.

The TCS management was delighted with the performance, but a little guarded on account of uncertainty thrown in by UK’s decision to leave the European Union last month.

“It has been a very strong quarter on multiple dimensions,” said N. Chandrasekaran, chief executive officer (CEO). “What is good is the footprint. All markets (are) growing. All verticals have grown. Most of the growth is driven by either cloud adoption for business agility purposes or, like in telecom, front-office transformation using digital (technologies).”

His reference to the cloud and to digital is aimed at highlighting the quality of the company’s revenue. Both are considered contemporary, if not futuristic.

The management claimed that 15.9% of quarterly revenue came from the lucrative digital space, which translates into about $693.6 million, making it the leader in this domain among home-grown software companies.

Indian software firms are increasingly offering customers newer technologies, including digital, automation and artificial intelligence, helping them earn higher margins and compete more effectively with foreign rivals such as International Business Machines Corp. and Accenture Plc. for large deals, even as clients cut their information technology budgets.

“Still, we need to watch out how Brexit plays out, how companies react, particularly financial institutions, to Brexit. But as of now, I have nothing specifically to caution (about),” said Chandrasekaran.

“TCS revenues are almost in line with our estimates, but margins have beaten our expectations. The results reflect a secular growth across verticals and geographies. With lower headwinds from Diligenta, Latam (Latin America) and Japan revenues, we do expect revenue growth rates to be better YoY,” said Dipen Shah, senior vice-president and head of private client group research at Kotak Securities.

Since recording a 6.7% quarter-over-quarter increase in the July-September period of 2014, Mumbai-based TCS has grown at an anaemic pace.

Its revenue grew 11.9% in constant currency terms last year, lower than Nasscom’s estimate of 12.3% for the industry, offering a chance to its smaller rival Infosys Ltd to gain ground. Under CEO Vishal Sikka, Infosys has reinvigorated itself and regained the tag of industry bellwether. It ended the last financial year with industry-leading growth of 13.3% in constant currency terms. The Bengaluru-based firm had hit rock-bottom in June 2014.

“We do not believe there is something really exciting in the revenue growth. But then we also believe that it is time TCS management lowers expectations, because it is unfair to expect 12-14% growth from a company of its size, unless it looks at acquisitions. For this reason, Infosys still has room to grow at a faster pace and we believe the company should report a higher growth,” said a Mumbai-based analyst at a foreign brokerage, who did not want to be named.

Infosys is to report its earnings on 15 July.

Analysts expect the company to post a 3.9% sequential dollar revenue increase.

Another challenge for TCS is that in the last two quarters, the company’s year-on-year growth has fallen behind Accenture’s. Accenture, which is twice the size of TCS, recorded an 8.5% dollar revenue increase in the March-May quarter and 6% growth in the January-March period (Accenture follows a 1 September-31 August financial year). TCS managed an 8.1% increase in the June quarter but reported 7.9% growth in the January-March period and 5.5% growth in the October-December period.

Still, one other heartening feature of TCS’s results, other than its focus on improving profitability, was that the company managed to arrest a loss in business from its insurance platform Diligenta and reported growth in the telecom space.

Japan still continues to be a weak market, and Chandrasekaran said it will take some time for the region to report growth. Considering that weakness in all three areas eroded about 2 percentage points from the company’s 11.9% growth on a constant-currency basis last year, this quarter’s performance is heartening.

TCS reported a 2.5 % improvement in the US, which accounts for 53.5% of company’s total revenue. The BFSI segment, which accounts for over 40% of the company’s revenue, grew 1.7% over the three-month period, even as the communication and media segment, which accounts for 11.3% of business, saw a 7% improvement. Manufacturing reported a 3.1% increase.

TCS saw the net addition of 8,236 employees in the three-month period, bringing the total headcount to 362,079. TCS’s attrition rate, including that of its back-office unit, improved to 13.6%.

“Suffice it to say there are many ways of looking at TCS’s results. Undoubtedly, the company did execute strongly. However, another reading could be that the Indian peer group is entering a phase of increased volatility, where we have to get used to more inconsistent results,” said Thomas Reuner, managing director of IT outsourcing research at HfS Research. “The market is facing a set of headwinds of heightened macro-economic risk as well as the transition toward the notion of Intelligent Automation in service delivery. Embracing automation can be a double-edged sword. It might help to lower the cost base, but it is also likely to severely disrupt the supply side, as they are going through the process to understanding the implications on commercial models.”

TCS shares rose 1.16% to Rs.2,520.30 on the BSE on a day the benchmark Sensex rose 0.46% to 27,942.11 points. The results were declared after the market’s close.