TCS posts weaker growth than expected; Q2 net profit up 1.8% at Rs 8,042 cr

Industry leader Tata Consultancy Services (TCS) on Thursday reported weaker than expected numbers in the quarter ended September 30, indicating that double-digit growth may elude the Mumbai-based IT services company in FY20. This is despite record deal closures in several quarters.

In the second quarter, the company’s revenue and profitability were adversely affected largely owing to softness in financial services and retail verticals. 

With 8.4 per cent rise in revenue in constant-currency terms, the IT bellwether fell short of its double-digit revenue-growth target. 
 

Also, the 1.6 per cent sequential revenue growth recorded by TCS in constant-currency terms was the lowest in the past two years. 

In Q2, TCS posted a net profit of Rs 8,042 crore, a 1.80 per cent rise over the corresponding period of the previous financial year while net profit declined by 1 per cent in sequential terms. 

During the period, the Tata group firm reported revenues of Rs 38,977 crore, a rise of 5.8 per cent rise on a year-on-year (YoY) basis. 

It was 2.1 per cent higher over the preceding quarter. In dollar terms, revenues were at $5.517 billion, an increase of 5.8 per cent YoY. The dollar numbers came marginally below Bloomberg estimates, which pegged it at $5.54 billion.

“We had seen a relatively moderate quarter. Our order book has increased both in size and duration, but on the flip side, it will take time to convert (into revenue). We have been clocking steady conversion but we don’t see it accelerating over the next two quarters,” said Rajesh Gopinathan, chief executive officer and managing director, TCS.

“We would need to deliver much higher growth in the second half (H2) of FY20 than H1 to register double-digit growth and we will see how that pans out.” 

Despite facing headwinds in banking, financial services & insurance (BFSI) and retail verticals, the IT firm was able to bag total contract value (TCV) worth $6.4 billion during the September quarter, which was the highest in six quarters. 

In the second quarter, the IT services firm saw a margin contraction of 20 basis points with an operating margin of 24 per cent. The dip in margin came as a surprise to the market as it was widely expected to improve profitability supported by a depreciating rupee.

“Currency wise, with respect to dollar, there was overall 0.7 per cent rupee depreciation whereas with respect to other currencies, the rupee appreciated. Euro has been flat. With significant growth for us coming from the UK and Europe, the currency movement didn't benefit us,” said V Ramakrishnan, chief financial officer, TCS. 

Among verticals, BFSI vertical grew 8 per cent YoY basis (as compared to 9.2 per cent in Q1FY20), while for retail & CPG, it was 4.8 per cent (as against 7.9 per cent in Q1).

"In BFSI, insurance segment is doing well. Regional banks in Europe and smaller banks across North America are also doing well. However, large banks across Europe and UK, and the Wall Street are under pressure," said Gopinathan. "In retail, we expect to see deals getting pushed out, although they've not been cancelled. We will have to wait and see their closure." 

On the positive side, life sciences & healthcare vertical grew 16 per cent, while communication and media saw a growth of 11.8 per cent YoY. "Telecom has crossed double digit growth and manufacturing will also break into double digit soon," he added. 

By the end of September quarter, revenues from digital services contributed 33.2 per cent to its overall revenue, which grew by 27.9 per cent in YoY term. 

In terms of geography, growth was led by the UK and the rest of Europe, which rose 13.3 per cent and 16 per cent respectively. Revenues from North America grew 5.3 per cent.

The IT major added 14,097 employees on net basis, the highest ever employee addition in a quarter, which took its headcount to 450,738. "We intend to make offers to around 30,000 freshers this year as well. We will be predominantly hiring people with digital skill sets," said Milind Lakkad, Global Head (Human Resources) at TCS.

Brokerage firms in general said that revenue miss was reflective of the general slowdown seen in client spending. "Operating performance of TCS was weak on both growth and margins. It confirms the weakness that street has generally been worried about due to the macro backdrop," said Emkay Global in a report. 

"EBIT margins slipped to 24 per cent, which is the lowest since June 2017 levels and reflect the impact of revenue pressure along with the build out of offshore bench as the industry continues to see increased off-shoring."