Rajesh Gopinathan, chief executive officer of Tata Consultancy Services, gestures as he speaks during a news conference in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Q3 Results: TCS Deal Win At $5.9 Billion By End Of Third Quarter, Margin Contracts

Tata Consultancy Services Ltd. deal momentum continued for the third straight quarter even as onsite hiring dragged the margin down for India’s largest software services provider.

Operating margin fell 90 basis points over the previous quarter to 25.6 percent in three months ended December, according to its exchange filing. That’s lower than estimates and also below the guided range of 26-28 percent. It was also the biggest sequential decline since April-June of 2017-18.

TCS secured deals worth $5.9 billion by end of the December quarter. To meet that demand, the company said it hired more employees which weighed on the margin. “We’ve been adding people. The costs primarily are higher because of the people cost,” V Ramakrishan, chief financial officer, said in a post-earnings press conference. “Wherever we are seeing growth opportunities we are filling that.”

Indian IT firms are also facing stiff competition at offshore sites from captive centres—that are operated and owned by clients themselves—as they cost less, said Amit Chandra, an analyst at HDFC Securities. Onsite hiring is also adding to the sub-account expenses which have been on a steady rise for IT firms, he added. “That shows a clear supply-side crunch both at the onshore and offshore location. This is causing a dent to the margin.”

Margin narrowed despite 2.7 percent depreciation in the rupee during the third quarter. Ramakrishnan also cited rupee volatility against various currencies and the higher cost of doing business in some major markets as other headwinds.

Key Earnings Highlights

  • Its net profit rose 2.6 percent sequentially to Rs 8,105 crore. That compares with Rs 8,154 crore consensus estimate of analysts tracked by Bloomberg.
  • Revenue rose 1.3 percent to Rs 37,338 crore quarter-on-quarter missing estimates.
  • Revenue in constant currency terms rose 1.8 percent. Revenue in dollar terms stood at $5,250 million.
  • Operating profit, or earnings before interest and tax, fell 2.2 percent to Rs 9,559 crore.

The digital business, which now accounts for 30.1 percent of its revenue, continues to lead growth rising 52 percent sequentially. Cloud computing, automation and analytics are increasingly becoming the mainstay for IT companies as clients are now are implementing them on an enterprise-wide level.

Its legacy verticals like banking and financial services and retail too saw revenue growth. But operating profitability took a hit. Chief Executive Officer Rajesh Gopinathan remains optimistic that BFSI is on a rebound and will soon see better growth. “We will be exiting the year at close to a double digit growth rate in BFSI,” he said.

BFS contributed more than $2 billion of $5.9-billion deals this quarter, while retail accounted for over $800 million.

Gopinathan said that deal momentum for the company remains strong and has risen nearly 20 percent over the previous quarter. “Order closure this quarter has been steadily increasing. On the pipeline front too we see a steady buildup.”

Worries Ahead

Still, there are plenty of things IT firms need to worry about. “Rising interest rates, the absence of a major tax break in the U.S. after the 2017 overhaul and slowing growth in Asia will likely curtail 2019 information technology spending growth,” Bloomberg Intelligence said in a report. “Brexit may also dent expansion, as companies look to cut costs.”

Gopinathan is unsure what the impact of such events will be. As of now he is not worried. “Macroeconomic trends are external and hard to predict. If something like that comes around there will be an impact. But right now we are not seeing any impact in the medium term.”

Meanwhile, the company also announced an interim dividend of Rs 4 per share. Shares of TCS closed almost unchanged in-line with the Nifty IT Index ahead of the earnings.

Other Highlights

  • Attrition rate stood at 11.2 percent, the lowest in Indian IT industry.
  • Headcount increased by 27,049 employees over last year.
  • The company added 8 clients in the $100 million plus band taking the total to 45.
  • It added 5 clients in the $50 million plus band, eight in the $20 million plus band, and 33 in the $10 million plus band.

(Corrects an earlier version that misstated the quarterly deal wins)