Tata Consultancy Services (TCS) kick-started the new fiscal with a soft first quarter, primarily due to slowdown in the banking and financial services (BFSI) segment. What also hurt earnings was currency appreciation.
Revenue in dollar terms remained subdued and increased 1.6% quarter-on-quarter to nearly $5.5 billion, which was below consensus estimates of 2.4%-2.6%, according to the results announced on Tuesday.
The company missed analyst expectations on revenues and operating income, while it beat estimates on net profit in rupee terms. The consolidated net profit for the three months of April-June, though flat q-o-q at Rs 8,131 crore, was much above Bloomberg consensus estimates of Rs 7,870.9 crore. This could be possibly on account of higher than expected forex hedge gains and lower tax rates, analysts said.
Revenues at the country’s biggest software services exporter stood at Rs 38,172 crore, flat compared with the March quarter and below Street forecast of Rs 38,541.8 crore. The constant currency (CC) growth in revenues was 2.2% on a q-o-q basis, according to a company official. TCS did not report q-o-q growth in CC terms in its release.
Speaking at the earnings conference on Tuesday, TCS CEO and MD Rajesh Gopinathan said the company has been witnessing stress in the BFSI vertical, especially in capital markets. However, TCS has remained on its course, given the digital transformation requirements from its clients across the globe, he said. “We are the largest service provider in this vertical globally. So, 9.2% growth on constant currency terms is a very significant growth. We do see some amount of stress emerging in the capital markets space across the world and the European banks in general and that has strengthened during the course of the quarter and that is what is reflected in the numbers.”
Digital revenue forms 32.2% of the total and has grown 42.1% year-on-year during the quarter.
In terms of headwinds, Gopinathan said the company does not see any new headwinds. “Situation has remained similar to what it was earlier,” he said.
Operating margins stood at 24.2%, a decline of 90 basis points sequentially. The firm reported an operating profit or Ebit (earnings before interest and tax) of Rs 9,220 crore, a fall of 3.3% on a sequential basis.
TCS chief financial officer V Ramakrishnan said there has been a combined impact of 2.4% of currency appreciation and salary hikes on the operating margins during the quarter. On the revenues, the impact of currency has been to the tune of 1.8% on constant currency terms and about 1.6-1.7% on account of rise in salaries, he told newspersons on the sidelines of the earnings conference.
“Some amount of currency depreciation is intrinsic to our model. However, we have seen a lot of currency appreciation off late and so that remains the only spoiler,” he said.
Meanwhile, after crossing into double digits in the previous quarter, BFSI’s revenue growth came in at 9.2% versus 11.6% in Q4FY19. The company said revenue growth was broad-based across verticals. Life sciences & healthcare led the pack, growing 18.1%, retail & CPG at 7.9% plus, communications & media at over 8.4% after growing in double digits in last two quarters. Technology & services grew at over 7.8% and manufacturing at 5.5% plus.
In terms of geographies, growth was led by UK at over 16%, followed by India at over 15.9% and Europe at 15% plus. Among other markets, North America grew over 7.7%, Asia Pacific above 9.5%, while MEA and Latin America at over 6.4%, respectively.
Strong hiring in Q1 resulted in a net addition of 12,356 employees, the highest in the last five years. The company has issued joining letters to over 30,000 fresh graduates. As much as 40% of them have been on-boarded in Q1 and the rest are expected to join by Q2. The company’s IT services attrition rate (LTM) stood at 11.5%.