Covid-19 weighs on TCS numbers in Q1; net profit falls 13.8% to Rs 7,008 cr

IT major says pandemic impact may have bottomed out

Despite being pounded by pandemic-related factors in the first quarter of FY21, Tata Consultancy Services (TCS) exuded confidence there would be a quick recovery, saying that the impact of Covid might have bottomed out.

The IT services major’s Q1 performance largely disappointed the street as the pandemic affected its revenues, profit, and operating margins harder than previously expected. Almost all the geographies and business verticals except life sciences and health care saw a decline in growth in the quarter. However, the company reported strong agreement wins, indicating a robust deal pipeline. The management maintained its previous commentary on coming back to the growth path from Q3 (October-December) stood as the Tata group company saw recovery in BFSI (banking, financial services, and insurance) and manufacturing from the current quarter onwards.

“The revenue impact of the pandemic played out broadly along the lines we had anticipated at the start of the quarter,” said Rajesh Gopinathan, chief executive officer and managing director.

“We believe it has bottomed out, and we should now start tracing our path to growth.”

In the quarter ended June, TCS reported profit before tax (PBT) of Rs 9,504 crore, which was 9.6 per cent lower than in the previous quarter and 10.65 per cent lower than the same period of the previous financial year. Net profit declined 13.81 per cent year-on-year (YoY) to Rs 7,008 crore for this period while sequentially it went down by 12.9 per cent. While revenues rose marginally in rupee terms, the decline was larger than what most market analysts expected in constant currency terms. 

In Q1, consolidated revenues were higher by 0.39 per cent on a yearly basis at Rs 38,322 crore while they fell 4.1 per cent quarter-on-quarter.

In dollar terms, revenues stood at $5.09 billion, a fall of 7.8 per cent over the same period of the last financial year.

The extent of the damage due to Covid on its revenues was visible as the company reported a 6.3 per cent drop in top line in constant currency terms, owing to a sharper decline in key geographies such as the US and the UK. “If our current expectations play out, the recovery trajectory will be faster than what we had during the global financial crisis of 2008 because of a coordinated and early response taken by clients and institutions,” said Gopinathan.

In Q1, the operating margin of the company declined 54 basis points at 23.6 per cent year-on-year, while it was down by 150 basis points on a sequential basis.

“With this kind of contraction in revenues, there was a commensurate impact on margins. However, we had kept our cost under control and reduced the discretionary spend,” said V Ramakrishnan, chief financial officer. He also said the company was not planning to reduce the employee cost because involuntary attrition was the model the firm followed.

Among the verticals, lifesciences and health care continued to grow strongly at 13.8 per cent YoY, while BFSI declined 5 per cent. Retail and CPG (consumer packaged goods) fell around 13 per cent, manufacturing 7 per cent, and communication and media 3.6 per cent during the quarter.