Q3 result: TCS disappoints Street with slowest revenue growth in 8 quarters

Company misses revenue estimates, margin sees improvement

Information technology sector leader Tata Consultancy Services (TCS) on Friday reported a mixed bag of financial numbers for the quarter ended December 31, with the company posting its slowest revenue growth in eight quarters, though it improved profitability.

With softness seen in key verticals such as banking, financial services and insurance (BFSI), and retail, the company said the chances of posting double-digit growth in FY20 were remote. The Tata group firm also saw its headcount shrinking by around 4,000 people in the quarter, indicating a slower pace of hiring.

In the December quarter, TCS’ profit before tax declined 1.32 per cent to Rs 10,569 crore compared with the corresponding period of the previous year, though it showed a 0.4 per cent rise sequentially. The company posted a net profit of Rs 8,118 crore, a marginal rise of 0.2 per cent over the same period of the last financial year, while it grew 1 per cent sequentially.

The Mumbai-headquartered firm reported revenues of Rs 39,854 crore, a rise of 6.7 per cent year-on-year 

(YoY) and 2.2 per cent on a quarter-on-quarter basis (QoQ). Dollar revenues for the third quarter were $5.59 billion, a rise of 6.4 per cent YoY and 1.3 per cent in sequential terms.

In constant currency terms, revenues increased 6.8 per cent YoY, making it the second consecutive quarter of single-digit growth in revenues. In sequential terms, growth was 0.3 per cent, which is the lowest in the last two years.  

In Q2 FY20, the company posted an 8.4 per cent rise in revenues, while the top line grew 11.4 per cent in April-June.

"Last (fiscal) year, we had a growth rate of 11.4 per cent. We are not going to be anywhere near that. If we do better than 8 per cent, I will be quite happy. It is somewhere in that range," said Rajesh Gopinathan, CEO and MD, TCS. "The range of possibilities is not quite wide. But we are quite optimistic about what comes after that," he added.

TCS' constant currency growth in sequential term also remained the lowest among its peers. While Infosys posted a 1 per cent sequential rise in revenues, it was 1.8 per cent for Wipro. However, TCS' revenue base is more than double that of its nearest competitor.

"Third quarter was a challenging one as the sectoral trends of the first half of the year continue to play out during this period. However, we are happy about the way we have negotiated with the environment and performed in this quarter," said Gopinathan. The Tata firm, however, showed an improvement in its operating margin owing to cross currency gain and efficiency measures. Margin expanded by 100 basis points in sequential terms at 25 per cent.

"Our ability to expand our margins in a volatile environment speaks of the strength of our business model, strong execution focus and the higher quality of revenues," said V Ramakrishnan, chief financial officer at TCS.

Also, momentum in large deals continued as TCS signed $6 billion contracts in the quarter, taking the total contract value (TCV) of deals signed during the first nine months of the fiscal year to more than $18 billion, 22 per cent higher YoY.

Among business verticals, TCS continued to face growth bumps in the BFSI and retail segments. While its BFSI vertical grew 5.3 per cent YoY, the retail segment grew 5.1 per cent.

"The UK and US (banking businesses) were structurally challenging during the quarter as clients were focussing on cost optimisation. However, we have added 20 small and medium new clients in the US apart from serving our large banking clients. Also, within BFSI, the insurance segment has performed extremely well in Q3," said N Ganapathy Subramaniam, chief operating officer.