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.

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