TCS profit, margins in Q1 beat Street estimates

But revenue growth and attrition a concern; management confident of growth

Tata Consultancy Services (TCS), India’s largest information technology services provider, beat consensus estimates on net profit and margin for the quarter ended June. But revenue growth in dollar terms was below the Street’s estimates.

A major positive was volume growth of 4.8 per cent, which followed disappointing performances on this front in the past few quarters, though it was lower than 5.7 per cent in the first quarter of FY15 and 6.1 per cent in the year-ago period. For TCS, the first half of a financial year is generally stronger from a growth perspective.

The company reported a net profit of Rs 5,708.9 crore, up 12.8 per cent from Rs 5,057.8 crore in the first quarter of FY15. On a sequential basis, net profit was down 3.3 per cent from Rs 5,906 crore. TCS’s fourth quarter profit had a one-time impact of bonus pay-out of Rs 2,628 crore to employees.

At Rs 25,668 crore, revenue was up 16.1 per cent on a year-on-year basis and six per cent sequentially. A Bloomberg poll of analysts had estimated it at Rs 25,670 crore. In dollar terms, revenue grew 3.5 per cent on a quarter-on-quarter basis. While the growth was much better than in the past few quarters, it did not meet Street expectations of 4-4.2 per cent.

What came as relief was the management’s commentary, which seemed confident of growth in the future. “Demand growth continues to be strong. We have seen a robust rebound in the North American markets. Some of the verticals we were cautious on have grown well. Clients are making significant investment in digital,” said N Chandrasekaran, managing director and chief executive.

He, however, cautioned pressure would continue in the energy and utility segments and said the telecom vertical and regions such as Japan and Latin America would continue to be volatile.

“TCS is the first company in the sector to report (results) this quarter. Overall, the broad numbers and segmental factors seem reasonably solid (the management was comfortable on the outlook) and do not point to any significant concerns for the sector. For TCS in particular, quarter-on-quarter revenue growth of more than four per cent in the first quarter was required to keep it on course for FY16 growth to be comfortably, similar to that in FY15, and establish itself as a clear leader. The 3.5 per cent number, especially in light of its premium valuations (its premium to Infosys has risen to 25 per cent+ after the 10 per cent+ relative outperformance in the past three months) will qualify as somewhat of a disappointment,” Anantha Narayan and Nitin Jain, research analyst at Credit Suisse, said in a report.

Despite a wage increase in the first quarter, operating margins stood at 26.3 per cent. The company had a 190-basis-point impact due to wage increases. However, better operational efficiencies (+30 basis points) and currency (+70 basis points) helped it narrow the gap.

Rajesh Gopinathan, chief financial officer, said: “Margins is the reflection of our growth in core markets such as North America, which have done well. We continue to focus on optimising our cash conversion ratios and investing in people and technologies ahead of our business needs.”

The other significant aspect of the results was the company’s strategy for its digital platforms. For the first time, TCS disclosed its digital revenue --- 12.5 per cent, or $2 billion, of its consolidated annual revenue of $15.5 billion. Chandrasekaran acknowledged demand from core markets such as North America and greater traction for ‘digital’ solutions in key verticals such as financial services, retail and life sciences had driven volumes and growth in the first quarter. The company said it continued to see healthy traction in its digital business and believed it would grow at a faster pace going forward.

Analysts are awaiting a detailed break-up of the digital revenues.

“Given the strong pipeline and market adoption of digital across industries, we are investing to train about 100,000 professionals this year in all relevant technologies, Chandrasekaran said.

In the preceding quarter, TCS had, for the first time, announced annual revenue from its cloud platforms ($125 million). During the first quarter, 38 clients chose TCS cloud platform solutions.

In the June quarter, TCS posted incremental revenue of $136 million, driven by strong growth across core markets such as North America (up 4.4 per cent), the UK (2.8 per cent), continental Europe (2.2 per cent) and West Asia and Africa (8.1 per cent). Among segments, growth was led by retail (up 5.1 per cent), life sciences and health care (7 per cent), banking, financial services and insurance (3.3 per cent) and telecom (9.6 per cent).

The company’s management cited increased attrition (15.9 per cent) as a concern. After one of the lowest attrition levels among tier-I players, this has been inching up in the past few quarters. In the quarter ended March this year, attrition was 14.9 per cent.

Ajoy Mukherjee, executive vice-president and global head (human resources), said the company was working to reduce attrition, adding 15.9 per cent was on the higher side. He said during the first quarter of a financial year, attrition is high because many opt for higher studies.

TCS is training 100,000 employees across bands, on digital platforms. “Our focus remains making TCSers proficient in new technologies, giving them the tools to be more productive and building an engaged and diverse team of global professionals. This continues to yield results, with our utilisation rates being maintained at well over 85 per cent. The process of on-boarding this year’s campus trainees has also begun,” Mukherjee said.

At the end of the June quarter, the company’s overall employee count was 324,935 on a consolidated basis, with gross addition of 20,302 associates (net addition stood at 5,279 employees). Excluding trainees, the utilisation rate was 86.3 per cent; that including trainees was 82.9 per cent.

Ahead of the announcement of the company’s results, the TCS stock closed 2.8 per cent lower on Thursday, while the broader market closed with a loss of 0.41 per cent.
ROBUST NUMBERS

Revenue
Rs 25,668 cr
16.10% YoY
6% QoQ

Net profit*
Rs 5,709 cr
12.90%  YoY
-3.30% QoQ

OPM
26.30%

HITS

• 4.8% Volume growth
• 26.3%  Operating margins, despite wage hikes
• 100,000  Number of professionals to be trained this year on digital technologies
• 9.6% Growth across verticals ,with telecom growing  on a constant currency basis
• 6.9% Growth in life science and health care 
• 3.3% BFSI growth on a constant currency basis
• 4.4% North America growth rebounds on a constant currency basis, compared to a fall of 0.3% in the fourth quarter of FY15

MISSES

• 15.9%  Attrition
• 3.5% Dollar revenue growth; Street expectation was 4-4.2%
  * Energy & utility continue to be soft; telecom to be volatile
  * Falls in Japan, Latin America and Diligenta