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

TCS Targets 10% Dollar Revenue Growth As Key Banking Vertical Begins To Recover

Tata Consultancy Services Ltd. reported higher-than-estimated profit in the March-ended quarter as its core banking and financial services vertical started to recover.

Net profit rose 5.7 percent to Rs 6,904 crore compared with the previous quarter, TCS said in a stock exchange filing. That compared with the Bloomberg consensus estimate of Rs 6,810 crore.

Key Highlights

  • Revenue rose 3.8 percent over the previous quarter to Rs 32,705 crore.
  • Earnings before interest and taxes rose 5 percent to Rs 8,147 crore.
  • Operating margin expanded to 25.4 percent from 25.2 percent.
  • Dollar revenue rose 3.9 percent to $4.97 billion quarter-on-quarter.
  • TCS expects margin to remain 26-28 percent in the year through March 2019.
  • It targets a dollar revenue growth of 10 percent for the year.

Revenue from the banking and financial services vertical, the biggest contributor, rose 3.8 percent sequentially to Rs 12,430 crore. TCS had witnessed slower client spending particularly in the banking and financial services business in North America over last year as the information technology industry adjusted to newer technologies and automation.

That’s changing now. “Incrementally we are now more confident about BFSI North America than we have been in the past,” said Rajesh Gopinathan, chief executive officer, in a media conference after the results. “Though the revenues have still not started to flow in, early client discussions show that there’s not much stress left in the system.”

The next quarter will be a good one to validate the uptick in BFSI.
Rajesh Gopinathan, CEO, TCS

The revival of BFSI will be key to TCS achieving the 10 percent dollar revenue growth (constant currency) that Gopinathan said the company is targetting for the ongoing financial year. “We are committed to try and get it to double-digit growth and that’s where the entire focus is.”

If the company achieves this target, this will be the first time in three years that it registers double-digit dollar revenue growth.

Even with the “green shoots”, there is some softness in BFSI, added N Ganpathy Subrmaniam, chief operating officer at TCS. “After discussing with our clients, we believe that it has bottomed out.”

Ganpathy said the BFSI vertical is seeing strong demand for digital services such as security, blockchain, core system replacement and transformation. “All this gives us confidence that BFSI will grow,” he said.

Digital services now contribute 23.8 percent of TCS’ revenue and continues to drive growth, said Gopinathan. “The (digital) deals and transformation you’re seeing is ratification of the fact that this is resonating very strongly with our customers,”

The digital side of business will see a lot more scaling up in the coming year, said V Ramakrishna, chief financial officer. That coupled with signs of a turnaround in the BFSI vertical will “directly have that impact on our ability to drive more margin”.

Segment Breakup

  • Revenue from the banking and financial services vertical grew 3.8 percent sequentially to Rs 12,430 crore.
  • Manufacturing rose 7.8 percent to Rs 3,576 crore.
  • Retail and consumer business services increased 3.4 percent to Rs 5,567 crore.
  • Communication, media and technology grew 1.5 percent to Rs 5,451 crore.
  • Other services rose 3.8 percent to Rs 5,051 crore.

TCS added 66 new clients in $1 million-plus, 13 in $50 million-plus and three in the $100 million-plus range.

“The large deal wins have been pretty strong for TCS,” Amit Chandra, analyst at HDFC Securities, wrote in a note. “We expect sizes of digital deals to get larger and that's a trend in the industry.”

1:1 Bonus

  • The company’s board recommended a 1:1 bonus share issue.
  • The board approved a final dividend of Rs 29 per share.
  • TCS’ attrition rate stood at 11 percent in the year ended March.
  • The company will give back 80-100 percent of free cash flows versus 106 percent last year.

“Things are coming back on track, overall for the IT sector and not just TCS,” said Harit Shah of Reliance Securities. “The bonus share issue can be a sentimental positive as it can lead to better liquidity and investor participation. As far as fundamentals are concerned, nothing changes.”