TCS Says Worst Is Over After Pandemic Hits Q1 Results
Tata Consultancy Services Ltd.’s quarterly profit declined more than expected as delays in project execution and a shift to work from home due to the Covid-19 pandemic weighed on operations.
Net profit of India’s largest software services exporter fell 13% sequentially to Rs 7,049 crore in the April-June period, according to an exchange filing. That compares with the Rs 7,694-crore consensus estimate of analysts tracked by Bloomberg.
- Revenue fell 4.1% quarter-on-quarter to Rs 38,322 crore—lower than the estimated Rs 38,910 crore.
- Dollar revenue fell 7% to $5,060 million.
- Operating profit fell 9.7% to Rs 9,432 crore.
- Margin narrowed to 23.6% from 25.1%.
All economic activities, barring essential services, came to a halt in April and May as the novel coronavirus outbreak forced India to impose the world’s biggest lockdown for over two months. That led to a rise in costs for IT firms as most employees worked from home.
As the pandemic gripped the rest of the world, software outsourcers also lost billings as they generate most of their business overseas and the bulk of it comes from clients in financial services, manufacturing and communications sectors.
“The revenue impact of the pandemic played out broadly along the lines we had anticipated at the start of the quarter,” Chief Executive Officer Rajesh Gopinathan was quoted as saying in a statement. “It affected all verticals, with the exception of life sciences and healthcare, with varying levels of impact. We believe it has bottomed out, and we should now start tracing our path to growth.”
Clients are also likely to cut back spending as the pandemic will force companies to prioritise critical technologies over initiatives aimed at tech transformation—something that had been driving growth recently for Indian IT firms, according to Gartner. Worldwide IT spending is expected to decline 8% over last year to $3.4 trillion in 2020, it had predicted in May.
TCS, however, has a divergent view to that. “After an initial disruption, customers have now stabilised their operations and are now embarking on new beginnings to adapt and thrive in a post-pandemic world,” Gopinathan said. “We’re seeing many customers focus on front-end transformation, resulting in significant traction for our products and services.”
WATCH | TCS management’s take on Q1 Results
Better Visibility Ahead
Despite the challenges, TCS remains “quite confident” that a recovery is in sight over the next two quarters.
Gopinathan expects revenue to recover to pre-pandemic levels by the October-December period. TCS should have flat revenue growth year-on-year in the third quarter in rupee terms, he said.
He said the mainstay banking and financial services vertical should resume recovery from the second quarter itself, led by higher spending from European banks. North American banks, too, are expected to join in from the third quarter. It’s only U.K.’s banking industry that will take time to recover due to the double whammy of Brexit and Covid-19, Gopinathan said.
Other industries like manufacturing and retail might take a bit longer to give a realistic picture, he said. The company’s also positive that clients are neither canceling nor renegotiating contracts, he said.
- Total deal wins during the quarter stood at $6.9 billion, lower than $8.9 billion in the preceding quarter.
- Four new customers added in the $100+ million revenue band.
- Deal wins have been broad-based across verticals.
- Employee expenses were maintained rather than being cut, resulting in a contraction in margins.
- U.S. market was most impacted but it also showed the most resilience.
- Currently, only 1% of the global workforce is working out of offices.
Shares of TCS closed 0.29% down before the quarterly results were announced, compared with a 1.01% gain in the benchmark Nifty 50 Index.