TCS Q1 profit misses estimates on costs

Tata Consultancy Services Ltd (TCS) reported a 5.2% rise in quarterly profit from a year earlier, missing analysts’ estimate, as rising employee costs squeezed earnings even as demand remained robust.

The Mumbai-based company’s net profit rose to ₹9,478 crore in the quarter ended 30 June from ₹9,008 crore in the year ago. However, that trailed the ₹9,907 crore consensus profit estimate in a Bloomberg survey.

Revenue for the June quarter grew 16.2% from a year ago to ₹52,758 crore on the back of broad-based growth, in line with the consensus Bloomberg estimate of ₹52,491 crore.

“We are starting the new fiscal on a strong note, with all-round growth and strong deal wins across all our segments. Pipeline velocity and deal closures continue to be strong, but we remain vigilant given the macro-level uncertainties. Looking ahead, we remain confident in the resilience of technology spending and the secular tailwinds driving our growth,” said Rajesh Gopinathan, chief executive officer and managing director of TCS.

The macro-level uncertainties that Gopinathan refers to relate to possible recessions in the US and Europe, where central banks are raising interest rates aggressively to tame red-hot inflation. Indian software services companies, which generate more than 90% of their revenues from these regions, may see sharp cuts in IT spending by clients located in these nations if the rate hikes tips their economies into a recession.

If clients indeed scale back spending, it will come after two pandemic years of robust demand for digital and cloud computing services as companies scrambled to digitize their operations. Some analysts fear peak revenue growth for IT services companies is likely behind them, and the momentum is expected to start softening from the second half of the fiscal year because of fewer large deals and clients postponing spending. In addition, margins are under pressure due to wage hikes, higher hiring costs, and increased travel, visa, and other discretionary expenses.

However, researcher Gartner expects IT spending to remain strong in the second half of the calendar year.

“Gartner projects that overall IT services spending will grow at 6.2% in 2022. Despite the macroeconomic uncertainties, Gartner believes that overall IT demand will remain robust for the second half of 2022,” said Naveen Mishra, senior director analyst at Gartner.

TCS’s operating margin contracted to 23.1% from 25.5% in the year-ago period due to “annual salary increase, the elevated cost of managing the talent churn, and gradually normalizing travel expenses,” said Samir Seksaria, chief financial officer, TCS. He told reporters that TCS would use better workforce utilization, growth, and other operational efficiencies to get back to the optimum level of margins.

The dollar revenue for the June quarter grew 15.5% in constant currency terms from a year earlier to $6.8 billion amid an order book worth $8.2 billion.

In terms of industries, growth was led by retail and consumer packaged goods (25.1%), followed by communications and media (19.6%), manufacturing (16.4%), and technology and services (16.4%). The banking, financial services and insurance (BFSI) sector, the largest vertical for TCS, grew 13.9%, while life sciences and healthcare grew 11.9%.

Analysts believe TCS is likely to be one of the key beneficiaries of the medium-term uptrend in technology spending. “We expect TCS to gain market share on the back of vendor consolidation and captive monetization efforts. However, moderation in Ebit margin and lower order book would reduce the pace of earnings growth going ahead and may lead to a downward revision to valuation multiple,” said Mitul Shah, head of research at Reliance Securities.

On a trailing 12-month basis, the attrition rate increased to 19.7% in the June quarter from 8.6% in the year-ago period, indicating a growing demand for tech talent in the industry, especially in digital skills. The company added 14,136 employees during the quarter, taking the total headcount to 606,331.

TCS declared its earnings after the end of trading on Friday. Ahead of its results, the shares fell 0.67% to ₹3,264.85 on BSE.