Rajesh Gopinathan, chief executive officer of Tata Consultancy Services Ltd. (Photographer: Dhiraj Singh/Bloomberg)  

Q4 Results: TCS Profit Beats Estimates But Margin Contracts

Tata Consultancy Services Ltd. continued to see steady growth in business even as profit remained flat and margin narrowed in the March quarter.

Net profit rose 0.3 percent sequentially to Rs 8,126 crore in the January-March quarter, according to its exchange filing. That compares with the Rs 7,981-crore consensus estimate of analysts tracked by Bloomberg.

  • Revenue rose 1.8 percent to Rs 38,010 crore quarter-on-quarter.
  • Revenue in dollar terms grew 2.8 percent to $5,397 million.
  • Operating profit fell 0.2 percent to Rs 9,537 crore.
  • Margin contracted 40 basis points to 25.1 percent.

“This is the strongest revenue growth that we have had in the last fifteen quarters,” said Rajesh Gopinathan, chief executive officer, in a media statement. “Our order book is bigger than in the prior three quarters, and the deal pipeline is also robust. Despite macro uncertainties ahead, our strong exit positions us very well for the new fiscal.”

TCS’ performance over the last two quarters has been anchored by strong deal momentum, suggesting a return in client confidence. While growth has returned to the software services provider’s legacy verticals such as banking and financial services and retail, its digital business continues to drive growth. That’s despite uncertainties such as slowing global growth and the impending Brexit.

Pressure On Margin

Even as the IT industry has started to move past the hurdles bogging them down for the past two years, a new challenge has emerged: rise in costs due to localisation.

Indian IT firms face stiff competition at offshore sites from captive centres—that are operated and owned by clients themselves—as they cost less. That adds to their sub-account expenses and eventually weighs on the margin.

“Even as IT companies have stepped up local hiring, the fact is that talent is not easily available at the mid-level. This will lead to increase in cost structure in the U.S.,” Kotak Institutional Equities said in a prior report. “The increase in cost structure was already visible in December 2018 quarter where subcontracting costs increased for Infosys Ltd. and TCS,” according to the report. “Some amount of rupee depreciation is necessary to offset the cost increase.”

The rupee has started strengthening against the U.S. dollar and that means the margin benefit IT companies had been getting last year would no longer be available. “The rupee, what was a tailwind, has now turned into a headwind,” said Sanjiv Bhasin, executive vice president at IIFL Securities. “If anything I would expect margins to be slightly weaker going forward rather than on the upside.”

Despite the dip, Gopinathan said that TCS’ margin is close to where they would like it to be. “We are comfortable with margins at this level; it’s close to our aspiration levels. Forty basis points here or there does not move the needle. From a strategy point of view, we are focussed on many other dimensions,” he said in the media conference.

Margins and the global slowdown should not concern investors right now, according to Trip Chowdhry, managing director of Global Equities Research. “I don’t think margins should be the focus. When you’re winning new customers for new services with a completely new set of value propositions, you have to go for a land grab. You win these large deals first and then eventually the margin will improve,” he told BloombergQuint.

Right now it is very important for long-term investors to focus on deal wins. Margins will come, maybe after 12 months. But the foundation for margin expansion happens when you are able to get the customer’s attention. That is exactly what TCS, Infosys and other Indian IT companies are doing.
Trip Chowdhry, MD - Equity Research, Global Equities Research

Chowdhry said that Indian IT companies will see broad-based growth due to the slowing global economy. “When the economy slows the customer looks for the best talent at the cheapest price. And Indian IT services will be a beneficiary of that. The difference is that TCS, Infosys and other Indian companies have repositioned themselves, reskilled themselves for new technologies—the demand for which are strong.”

Client Addition:

  • $100 million-plus band: 6 clients
  • $50 million-plus band: 2 clients
  • $20 million-plus band: 8 clients
  • $10 million-plus band: 21 clients
  • $5 milion-plus band: 37 clients

Other Highlights:

  • The board has proposed a final dividend of Rs 18 apiece.
  • TCS added a net of 6,356 employees during the quarter.
  • The company's closing headcount was 424,285 employees.
  • Attrition rate stood at 11.3 percent.

TCS’ stock has gained 5 percent during the January-March period. That compares with a more than 8 percent rise in the NSE Nifty IT Index during the period. The stock closed 0.26 percent lower today ahead of the results announcement.