Q2 Results: TCS Rewards Shareholders Even As Earnings Disappoint
TCS’ net profit fell 1.1 percent sequentially to Rs 8,042 crore in Q2 even as margins narrowed to lowest in nine quarters.
Tata Consultancy Services Ltd.’s quarterly profit fell and margin narrowed to its lowest in nine quarters despite rupee depreciation and lower visa costs.
Net profit fell 1.1 percent sequentially to Rs 8,042 crore in the July-September quarter, India’s largest software services exporter said in an exchange filing. That compares with the Rs 8,304-crore consensus estimate of analysts tracked by Bloomberg.
- Revenue rose 2.1 percent quarter-on-quarter to Rs 38,977 crore.
- Revenue in dollar terms rose 0.6 percent to $5,517 million.
- Operating profit, or EBIT, rose 1.5 percent to Rs 9,361 crore.
- Operating margin narrowed 20 basis points to 24 percent, the lowest in nine quarters.
“Clearly, the numbers are disappointing,” Harit Shah, senior IT analyst at Reliance Securities Ltd. told BloombergQuint. “The margin performance has been a concern for a while now but this has come out to be a negative surprise to what we had anticipated.”
The results come as a surprise as analysts expected a sharp improvement in margin. Depreciation in the rupee during the quarter was expected to help TCS as software services providers bill majority of their U.S. and overseas clients in dollars. Besides, the company had absorbed the impact of wage hikes in the first quarter itself. A seasonal moderation in visa costs, too, should’ve helped.
TCS said that margin was impacted as it kept up investments to service its $6.4 billion orderbook, which was at a six-quarter high. “We have been gearing up for growth despite the volatility,” said V Ramakrishnan, chief financial officer of TCS, said in the media statement. “Our margins in Q2 reflect our continued investments in our people, and in building the capacity we need to fulfill our strong order book.”
Ramakrishan also downplayed the currency impact, saying that while there were fluctuations, the overall impact was minimal.
“There is a perception that there is currency depreciation this quarter. But look at the breakdown. Against the dollar, while there were gyrations, the rupee depreciated 1.7 percent during the quarter,” he said in the press conference. “Against other currencies, especially the pound sterling, the rupee has actually appreciated and the euro has been more or less flat.”
“If you look at our growth, the significant growth has been in the U.K. and continental Europe. Those currencies are where we have a rupee appreciation rather than depreciation. The impact of currency is really not there,” Ramakrishnan said.
Still, global headwinds shroud the future for Indian IT companies. A deepening economic slowdown in Europe, greater Brexit-related uncertainty and increased trade tensions between the U.S. and China could result in slower sales growth as clients delay spending. Research firm Gartner expects the risk of an economic downturn “high enough” to warrant preparation and planning.
Watch | TCS management on the firm’s quarterly performance.
Bigger Deals, Slower Conversion
Chief Executive Officer Rajesh Gopinathan said that despite the negative commentary around slowdown in the industry, TCS has actually witnessed its order book grow both in deal size and deal duration. “This is a good from a structural perspective.”
That comes with it’s own issues. “The flipside is that it will take time for this orderbook to convert. I do not expect any acceleration in Q3 and Q4,” Gopinathan said.
Even in its digital business, which now contributes 33.2 percent of the total revenue, deal conversion is taking a longer time. “The nature of digital deals is much more transformative and end-to-end. That doesn’t lend itself to an immediate conversion,” Gopinathan said.
He explained that while TCS was expecting slower growth in its mainstay banking, financial services and insurance business, the performance of the retail business came as a surprise. “In retail, we are seeing deals getting pushed out. They are still not cancelled though. The pipeline is there, but we'll have to see about the closure,” Gopinathan said.
BFSI, insurance, regional European banks and smaller banks in North America are doing well, he said. “But the large banks across Europe, U.K. and even Wall Street, almost all are continuing to be under pressure.”
Still, sequential revenue growth in rupee terms was led by the BFSI business which grew 3 percent. The manufacturing segment saw flat revenue growth.
Board Approves Dividend
The TCS board also approved a second interim dividend of Rs 5 per share and a special dividend of Rs 40 per share. These shall be paid on Oct. 24, 2019, while the record date will be Oct. 18, 2019.
It had last paid the same amount in the first quarter of 2014-15.
Watch | Sajeet Manghat breaks down TCS results.
Other Highlights
- Net employee addition was at 14,097, the highest ever during a quarter for TCS.
- Consolidated headcount is now at 450,738 employees.
- Attrition rate stood at 11.6 percent.
- Europe and U.K. saw double digit growth while all other geographies grew in single digits.
- Digital business grew 28 percent year-on-year.
On Thursday, TCS shares fell 0.80 percent to Rs 2004.40 apiece on the BSE while the benchmark Sensex lost 0.78 percent to end the day at 37,880.40 points.