 "TCS numbers disappoint yet again")
In the quarter ended December 31, 2015, TCS reported a net profit of Rs 6,109.5 crore, a growth of 12.2 per cent compared to the same period last year. The revenue at Rs 27,364 crore grew 11.7 per cent on a year-on-year (y-o-y) basis.
The results were declared after market hours. The TCS share has been an underperformer in the market and touched an 18-month low on Tuesday to close at Rs 2,324.05 on the BSE.
According to a consensus estimate by Bloomberg, TCS was expected to report a net profit of Rs 6,023 crore in the December quarter on a revenue of Rs 27,643 crore.
The company said the revenue growth was primarily impacted on continued weakness in Diligenta (its insurance business), Japan and India. Chennai floods accentuated TCS' woes in a seasonally weak quarter hit by higher number of furloughs and holidays. Its international business and most of the business lines — except for energy and utilities — reported growth. On sequential quarter basis (compared with the September 2015 quarter), the net profit was up by 0.9 per cent while the revenues grew 0.7 per cent. Under the US GAAP, the revenue at $4.15 billion grew 5.5 per cent on YoY basis, while the net profit grew six per cent at $926 million. Sequentially, the dollar term profit was flat while the revenues saw a decline. In a regulatory filing last year, the company had said that it was expecting its revenues as well as net profit to be impacted due to the Chennai floods. TCS has 65,000 employees, about 20 per cent of its total work force, based in Chennai.
More importantly, its constant currency revenue growth came at just 0.5 per cent versus street expectations of one per cent growth. This weakness was largely on account of the Chennai floods in the quarter. Rival Cognizant has been closing the revenue gap with TCS in the past few quarters. This is reflected in the dollar revenue growth posted by both the companies in recent quarters.
In the past three quarters ending September 2015, Cognizant's dollar revenues have grown between 3-6 per cent while that of TCS have been in the range of -0.8 per cent to 3 per cent. This quarter as well, this metric fell 0.3 per cent sequentially for TCS. Meanwhile, Cognizant issued a statement reaffirming its 21 per cent revenue growth guidance for 2015, and said that its Business Continuity Plan had largely mitigated the financial impact of flooding. Cognizant too has a large operation in Chennai with 60,000 employees.
The digital vertical, a core focus area for TCS, grew by 4 per cent sequentially and now accounts for 13.7 of total revenues. The company is making investments across various digital platforms. In terms of profitability, TCS' operating margin during the quarter stood at 26.6 per cent, a decline of close to 50 basis points when compared with the previous quarter though it was seen well within the expected range. Sarabjit Kour Nangra, vice president research - IT, Angel Broking said, "The EBITDA margin came in at 26.6 per cent vs 26.4 per cent expected, benefited by the currency." Lower tax rates coupled with higher other income aided TCS' net profit in the quarter which grew 0.9 per cent sequentially to Rs 6,109.5 crore and was marginally ahead of consensus estimate of Rs 6,010 crore.
Harit Shah, IT analyst, HDFC Securities, said, "TCS numbers are weak with no major positives. We are toning down our expectations slightly. We believe not just TCS but the industry will fall short of Nasscom revenue guidance of 10-12 per cent." The industry body had projected revenue growth of 10-12 per cent for the IT services industry in FY16.
The company said among the concerns it had raised in the previous quarter, it is starting to see growth in Latin America. On the other hand, its UK-based subsidiary Diligenta which has been struggling for some time, would take one more quarter before coming back to normal growth path. The company expects pain in the Japan market to continue in the near term. The company also said that the deal pipeline as well as win rate were good. During the quarter, the number of clients contributing $100 million or more in annual revenues went up by one to 34.
"In a challenging quarter with significant cross currency and other headwinds, we have operated with rigour and discipline to deliver credible margin performance and generated excellent cash flows," said Rajesh Gopinathan, chief financial officer, TCS. The company said there was no major threat to demand, and that it was not witnessing any cut in client budgets yet. Govind Agarwal, IT analyst, Prabhudas Lilladher said, "We believe TCS stock will see some downside tomorrow on the back of weak results. We are tweaking our estimates albeit marginally. We believe TCS should clock in dollar revenue growth of 11 per cent this fiscal." In FY15, TCS had clocked 15 per cent dollar revenue growth.
During the quarter, the company added 22,118 people on gross basis taking the overall headcount to 344,691. The attrition which has been a concern for TCS for quite some time came down to 15.9 per cent.