TCS Starts FY19 with Better than Expected Numbers, Net Profit Rises 23.5%

Beating Street estimates, the country’s largest information technology (IT) services provider, Tata Consultancy Services (TCS), on Tuesday kick-started the first quarter (Q1) earnings with broad-based growth, while showing a double-digit rise in dollar revenue for the second quarter (Q2) in a row as the management exuded strong confidence of continuing with the momentum for the rest of the year. The growth of the firm was supported by strong traction in the key BFSI (banking, financial services and insurance) vertical, which accounts for almost 40 per cent of the Tata Group company, coupled with bouncing back of the North American business.

Despite Q1 being a weak one for IT services firms, TCS was able to hold on to its operating margins and posted the fastest revenue growth in 15 quarters. For Q1 of this fiscal year ended June 30, the IT services firm posted 23.5 per cent rise in its consolidated net profit at Rs 73.62 billion, while in sequential terms, the net profit grew 6.3 per cent.

While the revenues at the reported currency grew 15.8 per cent to Rs 342.61 billion, in constant currency terms, it rose by 9.3 per cent year-on-year (YoY) and 4.1 per cent sequentially. In dollar terms, the company was able to grow its revenue at 10 per cent to cross the $5-billion mark.

After years of tepid growth in the BFSI vertical owing to lesser IT spends by North American banks, the vertical bounced back with 4.1 per cent YoY and 3.7 per cent QoQ growth. Higher digital spends by clients also helped the IT firm to clock around 40 per cent growth in digital revenues, which constituted 25 per cent of TCS’ overall revenues.

“We are starting the new fiscal year on a strong note, with the growth engine firing on all cylinders. Our banking vertical recovered very nicely this quarter, while other industry verticals maintained their momentum,” said Rajesh Gopinathan, chief executive officer and managing director of TCS.

SALIENT FEATURES

• Double-digit revenue growth of 10% in USD terms, for 2nd quarter in a row
• Management optimistic of continuing with double-digit growth in the full year
• BFSI back to strong growth of 3.7% (QoQ), North America bounces back
• Digital business grew 45% YoY basis, accounts for 25% of overall revenues
• Employee count crosses 400,000 for first time, stood at 400,875

“With a good set of wins during the quarter, a robust deal pipeline and accelerating digital demand, we are focused on coming back to well above the double-digit growth path (in revenues) in the current fiscal (year).”

Despite rolling out a wage hike in Q1, TCS was able to keep its operating margins at 25 per cent as against 25.4 per cent in the preceding quarter as cross-currency gains and higher operational efficiency supplemented margin levels.

“We have successfully defended the 25 per cent margin levels post-wage hike, which was helped by cross-currency gain, apart from margin improvement from operational factors,” Gopinathan said.

According to Chief Financial Officer V Ramakrishnan, the company had faced 180 basis points (bps) margin dip due to wage hike, it got the 70 bps benefits each owing to cross-currency gain and improvement in operational factors.

Apart from BFSI, other key verticals such as energy & utilities, and retail & consumer packaged goods also reported a strong growth of 30.9 per cent and 12.7 per cent, respectively. In BFSI, the company said IT spends by large banking clients was showing good momentum and it was confident of sustaining the growth.

Among top markets, North America has finally started bouncing back with a 7 per cent growth during the quarter although the UK and continental Europe outshone with more than 18 per cent rise.

“Growth has come with good cash conversion helped by favourable currency environment. Cash-to-net profit continued to stay above 100 and cash conversion in the quarter has started around 103 per cent,” said Gopinathan. He added that even with healthy dividends of over Rs 65 billion given by the company, it has enough cash balance of Rs 470 billion for the proposed share buyback.

During the quarter, TCS’ headcount crossed the 400,000 mark for the first time, while the company added around 5,000 employees during the quarter. Its attrition level also came down to 10.9 per cent. Ajoyendra Mukherjee, global head of HR, attributed the headcount growth to the in-sourcing as part of some of the larger deals.

“While TCS has continued to perform well on productivity terms, there is still a market perception of a larger focus on linear revenue sources which they need to change. The fast growing digital numbers are a positive sign,” said D D Mishra, research director at Gartner.

According to Madhu Babu, research analyst (institutional equities) at Prabhudas Lilladher, while profit after tax and margin numbers were decent, the dollar revenues were a slight disappointment. “The BFSI seems to have picked up due to the large deal wins that the company reported over the past few quarters,” he added. – Business Standard