Rajesh Gopinathan, chief executive officer and managing director of Tata Consultancy Services Ltd., smiles during a news conference in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Q2 Results: TCS’ Profit Rises After Margin Hits Seven-Quarter High

Tata Consultancy Services Ltd.’s profit rose on the back of margin expansion as the software services exporter benefited from a seasonal jump in business and a falling rupee.

Net profit in the July-September quarter rose 7.6 percent over the previous three months to Rs 7,901 crore, according to its stock exchange filings. Analysts tracked by Bloomberg had expected profit at Rs 7,917 crore.

  • Revenue in local currency rose 7.6 percent sequentially to Rs 36,854 crore.
  • Operating profit increased 13.9 percent to Rs 9,771 crore
  • Margin expanded 150 basis points to 26.5 percent. This is the first time in seven quarters that TCS’ margin rose to more than 26 percent.
  • Dollar revenue rose 3.2 percent to $5.2 billion, slightly higher than the anticipated $5.19 billion.

“The momentum in revenue growth has continued for a second straight quarter. That’s a positive,” said Madhu Babu, a senior IT analyst at Prabhudas Liladher. “The deals won over the last six to eight months have guided this momentum.”

We had expected margin expansion because currency has been a huge tailwind this quarter. TCS had already given a wage hike last quarter so there were no extra headwinds this time.
Madhu Babu, Senior IT Analyst, Prabhudas Liladher

The country’s largest IT services provider got a boost from the rupee fall as it bills majority of the U.S. and overseas clients in dollars. The rupee declined 5.6 percent in the quarter, making it the worst-performing Asian currency.

That wasn’t it though. Its mainstay banking, financial services and insurance business, which had witnessed a rebound last quarter after an extended slump, continued to perform well. Revenue growth in the BFSI vertical stood at 6.1 percent this quarter compared with 4.1 percent in the previous quarter. Retail and consumer goods business revenue rose 15.6 percent.

“Revenue growth was driven by expanding demand for digital transformation across verticals, and continued acceleration in BFSI and retail,” Chief Executive Officer Rajesh Gopinathan said in the media statement.

“This has been a very good quarter, with strong demand in areas like analytics, cloud and automation,” N Ganapathy Subramaniam, chief operating officer and executive director, said. Digital services now form around 28 percent of TCS’ revenue, rising 60 percent in constant currency terms over last year.

Software services providers are still continuing to revive business in North America as they face headwinds ranging from visa curbs and slower client spending to a shift towards automation. Yet, the U.K. and Europe have become the revenue growth drivers.

The firm expects to keep its “margins resilient” even as it continues making investments in the digital space, Chief Financial Officer V Ramakrishnan said. “It is encouraging to be back in our preferred range of profitability at the operating level.”

Facing Headwinds

TCS expects to face challenges in the next two quarters, partly due to seasonality and macroeconomic headwinds. “The immediate short-term view is quite difficult to call. There are uncertainities out there,” Gopinathan said in the media conference.

There is the overhang of Brexit and trade wars. How that plays out into client budgets by the end of the year, we will know in through the next few months. Seasonality will also play out. No doubt about that.
Rajesh Gopinathan, CEO and MD, TCS

Yet, it remains confident that the momentum gained in the first two quarters will help it ride out the furloughs. “We now have the numbers on board and the momentum to ensure that the double-digit growth continues for the rest of the year,” Gopinathan added. “That’s why it is a landmark quarter for us.”

Key Highlights

  • The board declared a second interim dividend of Rs 4 per share. The record date has been set at Oct. 24, 2018.
  • TCS added four clients in the $100 million-plus band, 7 in the $20 million-plus band and 10 in the $10 million-plus band.
  • It had a net addition 10,227 employees during the quarter, its highest in three years.
  • IT services attrition rate stood at 10.9 percent.

TCS’ stock has had a good year. Not only is it the country’s best information technology stock, but its 46.6 percent rise has also outperformed India’s broader market indices. It closed 3.1 percent lower today ahead of the announcement tracking the selloff in the benchmarks.

 Q2 Results: TCS’ Profit Rises After Margin Hits  Seven-Quarter High

Watch the full media conference here.