TCS revenue remains lacklustre for 13th straight quarter
Bengaluru: Tata Consultancy Services Ltd (TCS), India’s largest software services company, on Thursday posted December quarter revenue growth that fell short of already downbeat Street expectations, as it battled headwinds in the US and soft demand from financial services clients.
In constant currency terms, which eliminate the effects of exchange rate fluctuations, TCS’s revenue in the seasonally weak fiscal third quarter rose 1.3% from the preceding three months.
This is the 13th straight quarter that TCS has either underperformed or, at best, managed to match analysts’ estimates in constant currency terms.
Mumbai-based TCS reported dollar revenue of $4.79 billion, a 1% rise from the preceding three months and up 9.1% from the year-ago period. In rupee terms, third-quarter revenue improved 1.2% to Rs30,904 crore from the preceding three months. TCS’s quarterly profit rose 1.1% sequentially to $1.01 billion (Rs6,531 crore), up 1.2% from $1 billion in the year-ago period.
A Bloomberg survey of analysts had estimated the company to report Rs6,532.7 crore ($1.03 billion) profit on net sales of Rs31,041.7 crore ($4.90 billion).
“TCS delivered a fairly strong Q3, especially in a seasonally weak quarter,” said Rajesh Gopinathan, who took over as chief executive officer of TCS in February last year after N. Chandrasekaran was appointed chairman of Tata Sons Ltd. “Overall, from financial performance perspective, it has been a relatively strong quarter…don’t forget that the 9.1% year-over-year growth is completely organic.”
TCS’s operating margin improved 10 basis points sequentially to 25.2% from 25.1% in the July-September period but was 80 basis points narrower than 26% in the year-ago period.
One basis point is one-hundredth of a percentage point.
Still, one encouraging metric in what analysts called a largely listless performance was the fact that the company did almost as much new business in the first nine months of the financial year as it did in all of last year.
TCS added $994 million in incremental revenue in April-December, higher than the $786 million in new business in the same period of the last fiscal year. In 2016-17, TCS added $1.03 billion in new revenue.
This means that TCS, which does not give any quarterly or yearly growth forecast, will certainly grow faster in 2017-18 than the previous year.
TCS’s performance in the third quarter was driven largely by a 2.6% constant currency rise in revenue from clients in continental Europe, which brings about 11.1% of total revenue.
Some of the company’s other smaller industry-serving units did well too: revenue from retail and consumer packaging and transportation saw a 6.4% sequential jump, while revenue from energy and utilities saw an 8.5% rise. Both these divisions accounted for 17% of TCS’s overall revenue.
But that was not enough consolation for analysts.
“TCS’s numbers continue to be uninspiring and listless,” said a Mumbai-based analyst at a foreign brokerage, on condition of anonymity. “For a few years now, management has always blamed some two or three underperformers for the tepid growth but the company until now does not give a reason behind the softness. The company claims these are not structural challenges but then what explains soft growth over such a long time? Yes, the company will grow higher than last year, but then, compared to its larger rival, there is not much to be happy.”
Accenture Plc., which is twice the size of TCS in revenue, is expected to grow its dollar revenue by 10.4% in the current fiscal year, implying that for the first time, it will grow faster than TCS, Cognizant Technology Solutions Corp., Infosys Ltd and Wipro Ltd in a financial year.
The challenges ahead for TCS include a weak performance in the US and soft demand from clients in the banking, financial services and insurance (BFSI) space.
Revenue from the US, which accounted for 52% of TCS’s third-quarter revenue, grew 1.5% in constant currency terms over the September quarter, and 2.8% over the year-ago period. BFSI, which accounted for 32.1% of TCS’s revenue, contracted 1.5% sequentially and grew just 0.2% from a year ago.
Some analysts fretted about the weakness plaguing its all-important BFSI arm.
“Rajesh (Gopinathan) continues to claim that the company’s banking segment in Europe did well. Now, there is a decline in the overall BFSI segment. This is worrying because this means there are multiple banks or clients in the US who, for reasons not known, are either holding back tech spend or deferring,” said a Mumbai-based analyst at a domestic brokerage who also declined to be named.
The company’s workforce increased by 1,667 to 390,880 employees at the end of December. TCS added 3,404 people in the September quarter after headcount fell by 1,414 in the June quarter.
TCS shares fell 0.67% to Rs2,788.40 on the BSE at the close of trading on a day the benchmark Sensex gained 0.2% to 34,503.49. The results were reported after markets closed.
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