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Business News/ Companies / News/  TCS net falls short as clients cut IT outlay
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TCS net falls short as clients cut IT outlay

Customers turn cautious amid a banking crisis in US, Europe
  • The IT major reported a strong order book at $10 billion in the March quarter and $34.1 billion for FY23
  • As people return to pre-pandemic activities and offices, the spike in demand that Indian IT companies saw during the peak of the covid-19 pandemic from digitization spending by clients is tapering. (Mint)Premium
    As people return to pre-pandemic activities and offices, the spike in demand that Indian IT companies saw during the peak of the covid-19 pandemic from digitization spending by clients is tapering. (Mint)

    NEW DELHI : Tata Consultancy Services Ltd missed analysts’ earnings estimates as clients, especially banks, turned abruptly cautious about spending amid a crisis in the US and Europe.

    Net profit rose 15% to 11,392 crore in the March quarter, TCS said in a statement on Wednesday. Profit rose 5% from the preceding three months. Analysts had estimated a profit of 11,530 crore on average, according to a Bloomberg poll. Sales rose 17% to 59,160 crore.

    As people return to pre-pandemic activities and offices, the spike in demand that Indian IT companies saw during the peak of the covid-19 pandemic from digitization spending by clients is tapering.

    Graphic: Mint
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    Graphic: Mint

    In addition, the impact of higher interest rates and the collapse of banks in the US and Europe have forced many companies to curb their spending.

    Sequential rupee revenue growth slowed to 1.6%, primarily due to sluggishness in the banking, financial services, and insurance (BFSI) sector. This quarter, BFSI saw a modest 9.1% growth, compared to 16.6% in Q3FY23.

    Rajesh Gopinathan, the outgoing managing director and chief executive, painted a picture of caution.

    “Last quarter, we expected North America to recover through the start of the year meaningfully. This recovery has obviously not materialized and turned out to be more negative, or slower than what we originally expected — and the numbers show that as well," Gopinathan said.

    Last month, Gopinathan resigned unexpectedly. On Wednesday, TCS said that CEO-designate K. Krithivasan, the current head of its banking and financial services division, will assume the role beginning 1 June. Gopinathan will remain with the company till September to ensure a smooth transition. Gopinathan added that the near-term weakness in North America would be reflected across the market.

    “We’re watching the current developments closely. The immediate impact is less, but of course, the near-term needs watching," he added.

    Biswajit Maity, a principal analyst at Gartner, said that TCS could face several serious challenges, the first of which is the persistently high attrition rate.

    TCS claimed to have contained the attrition rate to 20.1% for FY23, even as it has been reporting a rate of nearly 21.5% for the past two quarters.

    “It is also important that most of TCS’s workloads are based on legacy clients. If they are dealing with a majority of legacy clients, increasing operating margin becomes increasingly difficult," he added.

    TCS reported a strong order book at $10 billion in the March quarter and $34.1 billion for FY23.

    Healthy deal wins and strong client additions provide decent revenue growth visibility for FY24, said Sanjeev Hota, head of research at brokerage Sharekhan.

    “However, near-term weakness in North America and BFSI sector crisis will impact demand outlook and overall global client sentiments. TCS is well-placed to capture opportunities from optimization and transformation opportunities, but the weakness in North America will keep near-term prospects muted," Hota said.

    While Hota retained a ‘buy’ rating for TCS, Mitul Shah, head of research at brokerage firm Reliance Securities, assigned a ‘sell’ rating.

    On the management transition, Gopinathan said, “The strength of our order book demonstrates the resilience of demand for our services and gives us visibility for growth in the medium term. Krithivasan and I are working closely to ensure that the leadership transition over the next few months is smooth and seamless to all our stakeholders and that TCS is well positioned to capture the opportunities ahead."

    The company has identified generative artificial intelligence (AI) as a key growth sector in the near term.

    “Technologies like ChatGPT take time to mature. As it matures, we will be ready for it. We’ll have a centre of excellence surrounding it and have specific competencies built around it. We’ll assess its drawbacks and find the pros, and find ways to deliver it in the right and meaningful way to our clients. We’re already working on this, and it’s happening right now. We’ve been working on generative AI that generates more software for decades now — we have plenty of core technologies, architectures and libraries, and we’re finding ways to deliver such tools to developers to use these in the best possible way," said N. Ganapathy Subramaniam, chief operating officer of TCS.

    TCS has proposed a final dividend of 24 per share for FY23.

    Surprisingly, the company added only 821 employees this quarter against the record 35,209 additions in the year-earlier March quarter.

    Milind Lakkad, chief human resource officer at TCS, said in the post-earnings press conference that the company will offer 100% of the variable pay in the March quarter, and “top performers" will be offered a payhike of 10-15% this year.

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    Published: 12 Apr 2023, 11:50 PM IST
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