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Business News/ Companies / Company Results/  TCS beats street expectations, but key growth metrics miss target

TCS beats street expectations, but key growth metrics miss target

Tata Consultancy Services kicked off the earnings season for the IT services sector by closing FY24 with a better-than-expected March quarter, but its numbers reveal weaknesses in key business segments

TCS's net revenue for FY24 grew 4.1% to $29.08 billion, which albeit being potentially one of the best among large-cap IT services firms, is one of the lowest annual revenue growths that the company has ever reported. (Bloomberg)Premium
TCS's net revenue for FY24 grew 4.1% to $29.08 billion, which albeit being potentially one of the best among large-cap IT services firms, is one of the lowest annual revenue growths that the company has ever reported. (Bloomberg)

NEW DELHI:Tata Consultancy Services Ltd, India’s largest IT services firm, kicked off the earnings season for the sector by closing FY24 with a better-than-expected March quarter. Besides, chief executive K. Krithivasan forecast an even better run for the company in the ongoing financial year—signalling a reversal from a downtick for the entire IT services industry.

The company reported net revenue of $7.36 billion for the January-March quarter, up 1.1% sequentially—in line with analyst expectations of up to 1.5% growth. Net profit for the fourth quarter was $1.5 billion, up 6.4% sequentially.

While industry experts labelled the company’s growth as “strong", analysts signalled caution due to key sluggish metrics across TCS’ largest contributing businesses and geographies.

“At the start of the quarter, we had expected our quarterly revenue growth to be higher by 50-100 basis points. But this did not happen due to uncertainties in the market, and decisions being taken at very short notices," Krithivasan. Still, “I wouldn’t say that I’m disappointed with the overall growth".

Net revenue for FY24 grew 4.1% to $29.08 billion, which albeit being potentially one of the best among large-cap IT services firms in FY24, is one of the lowest annual revenue growths that TCS has ever reported. Net profit for the full year was $5.62 billion, up 7.7% over FY23’s $5.22 billion.

TCS also reported a 150 basis point expansion in operating margin in the final quarter of FY24, at 26%. Growth during the period was largely driven by the company’s $1.83-billion digital transformation contract with state-run telecom operator, Bharat Sanchar Nigam Ltd (BSNL).

The company’s overall numbers fared in line with analyst expectations, including what Omkar Tanksale, equity research analyst at brokerage firm Axis Securities, termed as a “strong" end to FY24. However, TCS’s overall financials continued to signal weakness in revenue from the banking, financial services and insurance (BFSI) segment, as well as from the North America region—the IT sector’s largest income and growth drivers.

“We are seeing weakness in the BFSI sector nearing its bottom, which suggests that a revival could be on the cards. But it’s too early to say if we are there yet," said Krithivasan, adding that the company’s deal pipeline on “AI and generative AI projects has doubled to nearly $900 million for the quarter".

A poll of 29 analysts polled by Bloomberg had projected TCS’s fourth-quarter revenue at $7.38 billion and net profit at $1.45 billion, while a second poll of 43 analysts had forecast FY24 revenue and net profit at $28.97 billion and $5.53 billion, respectively. The company thus beat analyst estimates on all fronts, barring March quarter’s revenue.

On 5 April,Mint reported citing quarterly investor notes from Nomura and HDFC Securities that TCS was expected to report quarterly revenue growth of around 1.5%—which it fell just short of.

TCS also reduced its net headcount by 13,249 people through FY24, in what was one of the weakest years for hiring of tech graduates by the company—one of India’s largest mass recruiters. Milind Lakkad, chief human resources officer of TCS, said wage hikes will be rolled out to all employees starting this month itself, and would be between 4.5% and 7%. “Top performers will be given double-digit hikes," he said.

Analysts are viewing TCS’s quarterly and annual performance as fairly strong.

“The overall financial performance by TCS looked strong, especially looking at its order book for the quarters ahead—which the management claimed was one of the highest ever," Axis’ Tanksale said. “This signals that FY25 could be a significantly better year for growth—both for TCS and for the overall IT services industry. All eyes will be on Infosys’ results on 18 April, to understand if the health of the overall sector is recovering."

TCS does not offer revenue growth guidance. Krithivasan, however, did say that FY25 “should be a better year… even though it is too early to call by when stronger growth returns."

The company’s growth comes as Dublin, Ireland-headquartered Accenture, the world’s largest IT services provider, lowered its FY24 growth guidance to 1-3%—down from its initial projection of 2-5%—on 21 March. The revision reflected persistent weakness in the overall businesses of IT service providers.

Tanksale, on this note, added that the bounce-back for IT revenue growth may not be immediate.

“The nature of TCS’ earnings suggest that the revival of fortunes would be gradual, and we may see better growth for all service providers, and especially TCS, post Diwali. There are persistent challenges—North Americas, TCS’ biggest contributor, isn’t contributing to growth yet, as is the story with BFSI. As of now, the growth pace is likely to be driven by further levels of digital transformation—but it remains to be seen how TCS can cash in on this opportunity," he said.

The North America region, which contributes to half of TCS’s net revenue, saw revenue decline by 2.3% year-on-year in the March quarter, and by 20 basis points for the full year. Growth was driven by a 10.1% year-on-year increase in revenue from the UK and a 20.2% growth in India revenue, which collectively account for 22.1% of the TCS’s net revenue.

In terms of segments, BFSI, which contributed the largest share of TCS’ revenue (32%), declined 1% year-on-year. Manufacturing, and life sciences and healthcare, were the top performing businesses for TCS in FY24, growing 7.3% and 4.8%, respectively. Together, the two verticals accounted for 19.5% of the company’s overall revenue.

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Shouvik Das
Shouvik Das is a science, space and technology reporter for Mint and TechCircle. In his previous stints, he worked at publications such as CNN-News18 and Outlook Business. He has also reported on consumer technology and the automobile sector.
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Published: 12 Apr 2024, 03:55 PM IST
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