 "TCS revenue misses Street estimates in Q2")
TCS stock was down 2.17 per cent at Rs 2,328.50 per share ahead of the results. The company announced its results after trading hour.
TCS reported a net profit of Rs 6,586 crore for the quarter ended September 30, up 8.2 per cent, compared to Rs 6,085 crore in the consecutive quarter last financial year. Revenue grew 7.8 per cent at Rs 29,284 crore, from Rs 27,165.5 crore in the same quarter last year. Europe was the key market to drive growth for the company.
“TCS’ September quarter results have missed expectations on revenue growth, with company’s one per cent quarter-on-quarter constant currency revenue growth being the lowest sequential growth in the company’s reporting history in an otherwise usually strong period.
While management remains prudent and watchful, initial comments indicate they expect H2 to be better than the usual years (well in our view, this is still a hope). We would expect a modest negative reaction to these results in trade tomorrow,” said a note from Emkay Research.
The company also stated that growth in Q3 and Q4 of FY17 will be better than last year’s. However, analysts were not too confident of the same. Harit Shah, IT analyst, Reliance Securities, said, “Delayed India order book will boost Q3 performance and is not structural in nature. The uptick will be due to one-offs. Last year, revenues declined in Q3, while Q4 growth was a subdued 1.5 per cent. I would not read too much into it. I have already factored higher growth in Q3 and Q4 on a year-on-year basis.”
Margins at 26 per cent for the quarter were a surprise since the Street expected margins to be impacted due to cross-currency headwinds. The company said currency impact, primarily depreciation of pound, was a negative 40 basis points (bps).
What did come as a disappointment was the US dollar revenue, which grew by just 0.27 per cent. The company reported US revenue at $4,374 million; last quarter, the company reported revenue of $4,362 million. Volume growth at 1.3 per cent was also slow for Q2.
“It has been an ‘unusual Q2’ for TCS. Growing uncertainties in the environment are creating caution among customers and resulted in holdbacks in discretionary spending this quarter. We had said that BFSI (banking, financial services and insurance) spend will be soft and that has pretty much played out. In India, we saw a surprise, in term of postponement of some key orders to the extent of Rs 180 crore, which we expect to come in Q3. Then in Britain, we saw softness in retail, more in the UK and somewhat in the US,” said N Chandrasekaran, managing director and chief executive officer, TCS.
He also added he does not see any negative impact of the US Presidential elections and Brexit yet. “Today, I cannot factor any delay due to the US elections. However, I cannot make future projections. What I can say is tech spends are for real, digital transformation is for real. As for Brexit, while we still do not have any clarity, we are not anticipating any negative impact,” he added.
Growth drivers for the quarter were Europe and Asia Pacific, which grew 3.7 per cent and 3.5 per cent, respectively, while the US grew 1.4 per cent in constant currency basis. India de-grew by 7.6 per cent during the quarter.
Growth was under pressure due to softness in the banking and finance vertical, which is the largest revenue contributor for the company and discretionary spends being delayed in the retail sector. BFSI grew by just 1.2 per cent.
However, the company did not give much clarity on the softness in the BFSI vertical. “There is softness in BFSI. We have to see how this pans over the next few months; additionally the US will also have (Presidential) elections this quarter. But we see no cancellation of engagement, no headwinds in accounts,” added Chandrasekaran.
Digital revenue, which has been growing fast for the company, is now 16.1 per cent of its revenue for this quarter - digital grew by 20 bps.
Rajesh Gopinathan, chief financial officer, said: “What has been heartening about the margin expansion this quarter is that we have been able to achieve this at gross and multi-dimensional levels, with all business units improving. We continue to hold on to our target margin band of 26-28 per cent.”
The total employee strength at the end of Q2 was 371,519 on consolidated basis, with gross addition of 22,665 (net addition: 9,440 employees). The total attrition rate (last 12 months) fell to 11.9 per cent in IT services and was at 12.9 per cent, including business process services. The percentage of women in TCS rose to an all-time high of 34.3 per cent, while the number of nationalities was at 129.
“We continue to hire, in line with business demands and engage with our employees to help them learn and equip themselves with new skills to succeed in a digital world. We remain focused on building a team of global professionals with diversity and multiple skillsets. The process of onboarding this year’s campus trainees continues at the normal pace,” said Ajoy Mukherjee, executive vice-president & global head-human resources, TCS.