TCS result beats the Street, net profit rises 10.6%

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Tata Consultancy Services (TCS), India’s largest information technology services provider, entered the financial year 2016-17 with a strong growth. The first quarter numbers beat Bloomberg estimates on both topline and profit numbers.

Net profit for the quarter at Rs 6,318 crore was up 10.6 per cent from Rs 5,708 crore in the corresponding quarter last financial year. This was the second time when TCS surpassed Street estimate on profitability, after missing it for six quarters. Sequentially, profits were down marginally by 0.4 per cent.
Revenue for the quarter at Rs 29,304 crore, was up 14 per cent from Rs 25,668 crore in the same quarter last year. Broad-based growth across verticals and geographies and continued growth in the digital business aided this performance. While revenue was up 0.19 per cent from Bloomberg estimates, net profit was better by 4.25 per cent.

Revenue in dollar terms came in at 3.7 per cent in reported terms and 3.1 per cent in constant revenue terms. The 3.7 per cent growth was one of the best growth rates in the past six quarters for the company. Maintaining the momentum of a strong growth was a volume growth of 3.4 per cent.

During Q1, TCS posted the incremental revenues of $155 million – the highest in last seven quarters up to Q1 – driven by strong growth (constant currency) across core markets in North America (2.8 per cent), UK (3.8 per cent) and Continental Europe (4.6 per cent). India was the highlight among growth markets, which registered a constant currency growth of 8.5 per cent.

“This is a very strong quarter from multiple dimensions. From a footprint perspective, we are happy to see growth across sectors and geographies and across key indicators. All verticals are doing well. Our deal pipeline and deal wins look good. Strong execution and accelerating customer adoption of Cloud, Big Data & Analytics have driven broad-based growth across key markets and industries,” said N Chandrasekaran, chief executive & managing director.

The company continued its growth story in the digital business which now accounts for almost 16 per cent of its total revenue, up from 15.5 per cent. Chandrasekaran also said impact of Brexit was still a wait-and-watch situation. “The Brexit play is still playing out. We are closely watching it.”

Despite a strong growth and better managed quarter, the firm’s earnings before interest and tax (Ebit) margins at 25.1 per cent was a disappointment, especially when the company in the past had stated that it would maintain its margin in the 26-28 per cent band. This is perhaps one of the lowest ever margins for the company since FY09.

However, the management has a different take on margins. “We have done well in managing margins this quarter at 25.1 per cent. Our target for margins continue to be 26-28 per cent. Our intent is to drive profitability and get into the stated band,” said Rajesh Gopinath, chief financial officer and vice-president, in an analysts call post the results.

Margins were impacted by wage hikes (-200 bps) and currency movement (-20 bps). Margins had a positive impact of 120 bps due to operational efficiencies. Additionally margins were also aided by the fact that visa applications for FY17 were much lower than the past few years.

Analysts believe it will be a tad difficult for the company to take its margin above the 26 per cent for the FY17. “Yes, margin’s at 25.1 per cent is low. But, last year TCS ended with margins of 26.5 per cent. I think with new technology deals kicking in, we may see the margins moving up (from current levels),” said Sarabjit Kaur Nangra, of Angel Broking.

The other concern that was evident in the first quarter was a tepid growth in the BFSI (banking, financial services and insurance) segment at 1.7 per cent on a sequential basis. BFSI is the largest vertical for the company and for the past few quarters, its insurance vertical had been going slow. “The growth rate of BFSI has come down, but the incremental revenue growth in BFSI is better than last quarter. I think whatever is happening across the world will have to play out. So far, we do not have any negative or concerns from any client. We want to watch how Brexit gets played out. It will have implications, but what will those implication be on financial institutes (FIs) be needs to be seen. Implications will be different for every FI. These implications will have challenges and opportunities. We thought things will not move fast but UK has a new PM. Our approach is to work with customers closely,” added Chandrasekaran.

From a positive aspect, the firm was able to bring down its attrition to 12.5 per cent (for IT) from last quarter’s 14.7 per cent. The total staff strength at the end of Q1 was 362,079 on consolidated basis with gross addition of 17,792 (net addition: 8,236 staff).

“For the third quarter in a row, our attrition rates have fallen underscoring our ability to engage with employees and provide long-term careers. We remain focused on building a team of global professionals with diversity and multiple skill-sets and helping TCSers secure additional skills in new technologies. The process of on-boarding this year’s campus trainees has also begun.” said Ajoy Mukherjee, Executive vice president and Global Head, Human Resources.