Tech giant, Tata Consultancy Services (TCS) crossed the ₹10,000 crore mark in terms of profitability during the second quarter of FY23. Sequentially, TCS earnings improved. The company garnered a net profit attributable to shareholders at ₹10,431 crore in Q1FY23 up by 8.4% yoy and 10.-5% qoq. Consolidated revenue from operations came in at ₹55,309 crore rising by 18.01% yoy and 4.84% qoq. During the quarter, TCS posted growth across industry verticals and in major markets. Also, its order book stays strong. Post Q2 results, TCS shares are expected to trade neutral tomorrow.
On BSE, TCS shares closed at ₹3,121.20 apiece up by ₹56.25 or 1.84%. At the closing price, the company's market valuation of ₹11,42,063.11 crore.
TCS CEO Rajesh Gopinathan said, "The environment is challenging and it requires all of us to remain vigilant. We saw good demand resilience across all our markets."
Emkay Global Financial Services expects TCS stock to react on a 'Neutral' basis post-Q2 results. Among the key positives are - broad-based growth, steady progress on client mining (5 new clients addition in $100+mn bucket in Q2), and deal intake at $8.1 billion (book-to-bill ~1.2x).
On the overall financial performance, Emkay's note said, " TCS reported revenues of $6.88 billion, up 1.4%/8.6% QoQ/YoY (15.4% YoY CC and 4.1% QoQ CC), a tad below our expectations of $6.91 billion. Adjusted EBIT margin grew by ~90bps QoQ to 24%, in line with our expectations. Adjusted profits at ₹104.3 billion vs our estimate of ₹105.4 billion, due to lower other income."
In the quarter, Gopinathan also said, "We registered strong, profitable growth across all our industry verticals and in all our major markets. Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration, and outsourcing engagements. As clients prepare for a more challenging environment ahead, technologies like cloud that have been embraced now have to be fully leveraged to realize the promised value. TCS has the combination of contextual knowledge, technology expertise, and execution rigor to deliver on this imperative.”
In terms of industry-wide, on a year-on-year basis, TCS growth was led by Retail and CPG (22.9%), Communications & Media (over 18.7%), and Technology & Services (over 15.9%). Manufacturing as well as Life Sciences & Healthcare verticals grew over 14.5%, while BFSI grew over 13.1%. On a geographical basis, among major markets, North America led with over 17.6% growth; Continental Europe grew over 14.1% and the UK grew over 14.8%. In emerging markets, India grew by over 16.7%, Latin America grew by over 19.0%, Middle East & Africa grew by over 8.2% and the Asia Pacific grew by over 7.0%.
Meanwhile, Mitul Shah, Head of research at Reliance Securities said, "TCS reported marginally better performance in 2QFY23 with EBIT margin coming in at 24%, 30bps above our estimate of 23.7%." Adding Shah said, "Revenue grew by 1% QoQ/9% YoY in USD terms to $6,877 million, vs. our estimate of $6,878. Revenue growth in CC terms stood at 4% QoQ. EBIT grew by 9% QoQ (up 11% YoY) to Rs132.7 billion while EBIT margin stood at 24% (up 91bps QoQ /down 160bps YoY), 30bps above our estimate of 23.7%. Its net income stood at Rs104 billion (up 10% QoQ/ up 8% YoY), while adjusted margin came in at 18.9% vs. our estimate of 18.7%."
As of September 30, 2022, TCS workforce stood at 616,171 employees -- with a net addition of 9,840 during the quarter. IT services attrition was 21.5% on the last twelve months basis. TCS expects the attrition rate to taper down in the second half of FY23.
Milind Lakkad, Chief HR Officer of TCS said, "Our investments in capacity building and organic talent development have allowed us to substantially grow our business ahead of headcount addition this quarter. We believe our quarterly annualized attrition has peaked in Q2 and should see it taper down from this point, while compensation expectations of experienced professionals moderate.”
On TCS valuation, Shah added, "We believe that IT Services would not remain immune to worsening global macros in terms of rising inflation, economic slowdown, currency headwinds and likely cut on spending. Revenue growth would taper down to a low double-digit in FY24E, while QoQ decline in order book, clear lower employee addition, higher attrition, and lower pricing power ahead would lead to valuation multiple contraction close to its historical averages. Therefore, at present, we have SELL rating on TCS."
In the second quarter of FY23, TCS shares dropped by nearly 8%. The start of October has been broadly positive with TCS shares climbing more than 4.5%.
On Monday, TCS announced a second interim dividend of ₹8 per equity share for the fiscal year FY23. The company's board has fixed October 18 as the record date to determine the eligible shareholders for dividend benefit. TCS plans to pay the second interim dividend on November 7, 2022.
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