TCS net falls 2%, but beats estimates

Tata Consultancy Services (TCS) on Thursday said its second-quarter profits dropped 2.16 per cent year-on-year to ~6,446 crore, while revenue grew 4.3 per cent to ~30,541 crore. The revenue performance was in line with Street expectations, and was helped by improved business from clients, but profits were ahead of analysts’ estimates aided by better margins and other income. A poll of analysts by Bloomberg had pegged the net profit at ~6,287 crore.

The Tata group company’s business volume increased, as it won 47 clients, including an engagement with British insurer Lloyd’s, to provide policy administration for over 4 million clients using its platform. It also snatched clients from rivals to grow its digital business by 31 per cent over the year to contribute 19.7 per cent to its revenues.

Revenue and volume grew 3.2 per cent over the previous quarter (FY18 Q1), while operating profit margins in the same period improved by 1.7 percentage points to 25.1 per cent, due to currency gains and better efficiency across the organisation.

“The overall sense we are getting (after meeting customers) is return to optimism. It is measured and people are looking to leverage multiple technologies for transition to business 4.0,” said Rajesh Gopinathan, chief executive officer, TCS. “The conversations are on how to bring all technologies together — mass personalisation, liberating ecosystems, better harnessing data, automation, and embracing risk to generate exponential growth.”

TCS had reported profits of ~6,586 crore on revenues of ~29,284 crore in FY17 Q2.

In a first cut analysis prior to TCS’s earnings call with investors, Emkay Global’s analyst said, “We believe that the company has delivered strong growth and profitability performance despite sustained pricing pressure and weak rupee realisations.”

“EBIT (earnings before interest and tax) margins improved by 170 bps q-o-q at 25.1 per cent, well ahead of our estimates of 24 per cent. Profitability beat was driven by strong cost management both on operational factors (sub-contracting) and selling, general and administrative expenses (savings on visa/travel and other G&A). The OPM (operating profit margin) beat is a positive surprise despite weak pricing in the quarter,” they added. Emkay had estimated the net profit to come at ~6,070 crore in the September quarter.

The first large Indian information technology (IT) service provider to declare quarterly numbers, TCS expects business to grow across sectors, while awaiting recovery in investments from clients in banking and financial services and retail later this year.

Wipro, its smaller rival, will announce quarterly numbers on October 17, while Infosys, with its co-founder Nandan Nilekani back at the helm, will declare its numbers on October 24. Analysts said the numbers are positive, despite lack of growth from retail and incomplete recovery in technology spending from banking clients.

“The company’s numbers have been relatively better and it has seen an operational outperformance. TCS’s revenue number is actually uninspiring. Improvement on BFSI and growth in continental European market are two positives. The digital growth is at par with the industry,” said Apurva Prasad, IT analyst, HDFC Securities. TCS said it was taking away contracts from competition, as deal renewals increase for the first time in six quarters.

Contract trends were steady in the September quarter with 16.1 per cent year-on-year growth in global ACV (annual contract value), which was the highest in the past six quarters, said Prasad of HDFC Securities, analysing data from Gartner and ISG. While outsourcing for legacy services grew marginally by 1.4 per cent, nearly 44 per cent of the global contracts were in digital or deals that had vendors deliver product or solutions as a service. TCS said it won one client with $100 million, while six clients each in the band of $50 million, $20 million, and $10 million. The firm said it saw attrition reduce to 11.3 per cent, as it focused on training its resources in emerging technologies and digital, which has helped it grow its business in the newer domains.

At least 30,000 employees have been re-skilled over the past quarter. European business grew 5.3 per cent over the quarter, while Latin America grew 5.7 per cent.

The US, its largest market saw growth of 1.4 per cent, as it saw continued softness in business from banking and retail customers. The travel and hospitality and energy and utilities drove higher growth than other verticals for the company.

“Our client-centricity and business depth are resulting in industry-leading customer satisfaction levels and strong client metrics. With the sectoral headwinds slowly abating, we expect steadier and stronger growth ahead,” said N Ganapathy Subramanian, chief operating officer at TCS.

Gopinathan said the firm expects growth to return in both banking and retail sectors as traditional firms overcome fears regarding disruption from fintech startups and online commerce companies. “There was an assumption that fintech will disrupt the ecosystem. But now they realise that fintech will be one more component and banks are turning around how to get them to be part of the system,” said Gopinathan.

While retail was disrupted with the threat of e-commerce, largely on price, Gopinathan said, brick and mortar companies are fighting back with customer experience and regaining business. “As these models evolve, directionally the fear was old economy (companies) will be wiped out by the new economy (firms). That fear is over,” he said, adding that TCS is helping four out of the five big box retailers to transform digitally.

The TCS stock gained 1.92 per cent to close at ~2,548.55 on the BSE on Thursday. The results were declared after market hours.