TCS logs double-digit growth in Q3, but misses estimates
Net profit rose 1.9% to $1.14 billion from $1.11 billion in the preceding three months. The Mumbai-based company’s December quarter, or Q3, revenue rose 1.8% in constant currency terms from the preceding three months
Mumbai: Tata Consultancy Services Ltd (TCS) missed analysts’ estimates on earnings although the country’s largest information technology (IT) services provider posted a fourth straight quarter of year-on-year (y-o-y) double-digit revenue growth in constant currency terms.
The Mumbai-based company’s December quarter, or Q3, revenue rose 1.8% in constant currency terms from the preceding three months. Currency fluctuations took some sheen off the growth as dollar revenue grew at a slower pace of 0.67% to $5.25 billion in the quarter ended 31 December from the preceding three months.
“Because of TCS’s size, one should not try to evaluate its performance on q-o-q (quarter-on-quarter) as there will be some volatility. The heartening thing is that the company has a strong order book and its year-on-year growth continues to be in double-digit,” a Mumbai-based analyst at a domestic brokerage said on condition of anonymity.
Q3 is a seasonally weak one for IT firms as there are fewer working days for engineers deployed at client sites in the US and Europe, where companies shut because of Christmas and New Year holidays.
TCS reported a 9.7% dollar revenue growth from a year earlier in Q3, which was preceded by a 10% y-o-y growth in both July-September (Q2) and April-June (Q1) quarters and an 11.7% revenue growth during January-March (Q4 FY18).
Net profit rose 1.9% to $1.14 billion from $1.11 billion in the preceding three months, while operating margin narrowed 90 basis points to 25.6% from 26.5% in the July-September period, hurt by cross-currency movement and higher employee costs.
One hundred basis points make up one percentage point.
A Bloomberg survey of 17 analysts had estimated a profit of ₹8,154.4 crore ($1.17 billion) on net sales of ₹37,849.1 crore ($5.43 billion).
A few analysts were concerned about the contraction in TCS’s operating margin.
“Our Take: Decent revenue with momentum in BFSI (banking, financial services and insurance) and digital but no positive surprises,” analysts Anantha Narayan and Nitin Jain of Credit Suisse wrote in a note to investors after TCS Q3 results. “Negative margin surprise—increased costs in the US and adverse actual currency impact vs. estimates could be reasons.”
“While the revenue trajectory and contract wins remain strong, the markets are likely to view the margin miss negatively,” Diviya Nagarajan, an analyst at UBS Securities, wrote in a note after the company declared its Q3 results.
Still, the two biggest takeaways from TCS’s performance are that the firm will clock double-digit growth this fiscal and its impressive deal wins should help it maintain this growth in the next fiscal.
TCS, which follows an April-March fiscal, has managed a 10.3% dollar revenue growth in calendar year 2018, as it ended with $20.5 billion in revenue, implying that the firm added $1.9 billion in incremental revenue. TCS did $1.98 billion in new business, the highest, in fiscal 2011-12.
TCS won deals worth $5.9 billion in the December quarter, taking the total number of deal wins to $15.7 billion in the first nine months of this fiscal year.
This strong performance underscores why for the first time in three years TCS will outpace Nasscom’s industry growth projection of 7-9% in constant currency terms.
Chief executive Rajesh Gopinathan exuded optimism that, save for any macroeconomic downside risk, the company remained well-positioned to clock double-digit growth this fiscal and in the medium term.
“We have had a fairly strong quarter in a seasonally weak period,” said Gopinathan, who took over as TCS CEO in February 2017. “We’ve repeatedly said that we are closing this year on a much stronger note and are well positioned in the medium term.”
Clients spending more on TCS’s digital technology solution offerings helped raise its share of digital business, which surged 52.7% y-o-y and accounted for $1.58 billion, or 30.1%, of total revenue in the December quarter.
The US, which accounted for 51.2% of TCS’s third quarter revenue, and financial services, which constituted 30.8% of overall business, grew 8.2% and 8.6% y-o-y, respectively.
On Thursday, TCS shares rose 0.02%, or ₹0.35, to ₹1,888.15 apiece on the BSE while the benchmark Sensex fell 0.29%, or 106.41 points, to 36,106.50.
TCS Q3 results were announced after market hours.
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