 "TCS Q1 net profit beats Street, revenue growth misses the estimate")
Tata Consultancy Services, India’s largest information technology (IT) services company, on Wednesday kicked off the 2023-24 result season by reporting a net profit of Rs 11,074 crore in the April-June period. Even as the profit was 16.8 per cent higher on a year-on-year (YoY) basis, it was 2.7 per cent lower than the Rs 11,392 crore reported in the previous quarter, mainly on account of uncertain macros, slow growth in the company’s majority markets, and delays in project execution.
At Rs 59,381 crore, TCS’ revenue during the quarter grew 12.6 per cent YoY, but a mere 0.3 per cent over the January-March 2023, making this one of the slowest June-quarter growth rates in a decade for the company.
Though TCS reported a strong total contract value addition for the quarter at $10.2 billion, it missed Street expectations on revenue growth. According to Bloomberg estimates, the revenue for the quarter was expected at Rs 59,600 crore, and net profit at Rs 10,936 crore.
TCS Chief Executive Officer & Managing Director K Krithivasan, for whom this was the first quarter at the helm, said revenue growth was slow as clients paused, or programmes were delayed, or capacity was reduced in some cases. “Technology spends in the long term are strong and that is validated in the total value of contract we have signed. But in the near term, clients are pausing contracts where they see low returns on investment or these are not immediately critical for their business. But we have had a good quarter, given the macro environment that we are in.”
A softer June quarter also means achieving double-digit growth for the full financial year would become more difficult. For TCS and most other top-tier IT services firms, growth is driven by the first half of the year. “Given where we are at the end of the April-June, it (double-digit full-year growth) is a tall order to achieve. But, as management, we are always focused on opportunities; we will grow,” said Chief Operating Officer & Executive Director N Ganapathy Subramaniam.
On the ongoing investigation in the jobs-for-bribe issue, the company did not comment in detail. Asked about some of the weakness in the system, Ganapathy said: "Whatever had to be said has been stated. As a company, we keep on looking at our processes and make the requisite changes."
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Sanjeev Hota, head of research, Sharekhan by BNP Paribas, said: “Order book continues to remain healthy. But continuing weakness in banking and financial services (BFS), technology and communication vertical is likely to remain an overhang, and it may keep client sentiment muted. Additionally, management also referred to a near-term softness in the demand environment, given macro headwinds. We believe near-term outperformance of the IT sector will be restricted. We have a neutral rating on the sector.”
What does come as a concern for company is that its growth was led by the UK; its performance in its two important markets — the US and Continental Europe — was soft, with YoY growth rates of 4.6 per cent and 3.4 per cent, respectively. Additionally, banking, financial services and insurance (BFSI), the largest vertical for TCS, also witnessed slow growth. The company said demand for cost optimisation deals was on the table, as clients looked for vendor consolidation.
The company, meanwhile, is bullish on new technology, such as generative artificial intelligence (AI). The management said 50 proofs-of-concept had been signed and 100 projects were being discussed. But it might take a few more quarters for generative AI to make any meaningful contribution to the company’s top line.
The margins for the quarter, at 23.2 per cent, were up by just 10 basis point on a sequential basis, primarily due to a 200-basis-point impact of wage bills. Chief Financial Officer Samir Seksaria said: “We have gone ahead and rolled out our annual salary increase with effect from April 1. We are confident of maintaining our margins in the long term.”
What came as a big surprise was a drop in attrition — from a high of almost 21 per cent in the March quarter to 17.8 per cent. Despite the drop, the company hired only 523 people during the quarter. Chief Human Resource Officer Milind Lakkad said: “Our attrition continues to trend down. We expect it to be back in our industry-leading, long-term range (as employer) in the second half of the year. While we are committed to honouring all the offers we have made, our focus will be on leveraging the capacity we built last year.”