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Informist, Thursday, Oct. 10, 2024

 

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--Jul-Sept consol net profit INR 119.09 bln
--Analysts saw TCS Jul-Sept consol net profit INR 125.14 bln
--Jul-Sept consol revenue INR 642.59 bln
--To pay INR 10 per share interim dividend
--Jul-Sept consol net profit INR 119.09 bln vs INR 120.40 bln qtr ago
--Jul-Sept consol revenue INR 642.59 bln vs INR 626.13 bln qtr ago
--Apr-Sept consol net profit INR 239.49 bln vs INR 224.16 bln year ago
--Apr-Sept consol revenue INR 1.269 tln vs INR 1.191 tln year ago
--Jul-Sept consol sales up 5.5% on year in constant currency
--Jul-Sept consol operating margin 24.1%
--Jul-Sept BFSI segment revenue up 0.1% YoY in constant currency
--Jul-Sept North America constant currency sales down 2.1% on year
--Jul-Sept UK revenue up 4.6% on year in constant currency
--Jul-Sept consumer segment sales up 0.1% YoY in constant currency
--Total employee count up 5,726 in Jul-Sept to 612,724
--Jul-Sept IT services trailing 12-mo attrition 12.3% vs 12.1% Apr-Jun
--Jul-Sept India sales up 95.2% on year in constant currency
--Jul-Sept employee expenses INR 366.54 bln vs INR 364.16 bln qtr ago
--Jul-Sept order book total contract value $8.6 bln

 

By Apoorva Choubey 

 

MUMBAI – Tata Consultancy Services Ltd. reported lower-than-expected net profit for the September quarter, despite the company's revenue growth being the highest in seven quarters. Higher revenue contribution from a low-margin deal with Bharat Sanchar Nigam Ltd., a decline in overall deal wins, and weakness in demand from some developed markets may have led to lower operating margins and profits for the company, according to analysts.

 

For Jul-Sept, India's largest information technology company reported a consolidated net profit of INR 119.1 billion, down 1% on quarter. Analysts had expected the company's net profit to rise 4% sequentially to INR 125.1 billion. During the June quarter, the company's net profit, formally termed profit attributable to shareholders, had fallen 3% sequentially. This then is the second consecutive sequential fall in net profit for the technology bellwether.

 

The IT behemoth's consolidated revenue for the September quarter rose 2.6% on quarter to INR 642.6 billion, surpassing estimates of INR 641.4 billion. The last time the company's sequential sales growth was higher than this rate of 2.6% was during Oct-Dec in financial year 2022-23 (Apr-Mar), when the topline had jumped 5%.

 

During the September quarter, incremental revenues from the scale-up of TCS' deal with BSNL and some nascent recovery in the company's crucial banking vertical in the US likely underpinned the topline growth, at a time when discretionary IT spending remains weak around the globe. Brokerage Kotak Institutional Equities had projected $55 million of incremental contribution for TCS during Jul-Sept from the deal with BSNL. In April, TCS had said it is setting up large data centres in four regions of the country as part of its INR 150 billion deal with state-owned telecommunications company BSNL.  

 

The deal with BSNL may have propped up the topline, but it is likely to have been a drag on the profitability of the company. TCS' earnings before interest and depreciation margin fell to 24.1% from 24.7% a quarter ago. Analysts had been divided about how TCS' profitability would fare, but the actual earnings have belied even the most pessimistic of estimates of margin. The estimates for the company's EBIT margin ranged from 24.6% to 27.0%. 

 

Some analysts had said an inferior mix due to higher sequential revenues from BSNL, investment in talent development and training, and lower utilisation of staff will keep the company's operating margin flat from a quarter ago. Others, including Axis Securities, expected the slight depreciation of the rupee against the dollar and healthy deal wins to help profitability expand.

 

A closer look at the segment breakup of TCS' performance for Jul-Sept supports the view that the company's operating margin may have contracted due to a higher share of revenues from BSNL. The company's communications and media vertical saw revenues jump 12% sequentially, but clocked a 4?ll in segment profit. 

 

The company's total expenses increased over 3% on quarter to INR 489.6 billion, led by a rise in other expenses and cost of equipment and software licences. Other expenses rose 3.5% sequentially to INR 76.4 billion while cost of equipment and software licences jumped over 50% to INR 32.3 billion.

 

"We made strategic investments this quarter in talent and infrastructure to ensure sustainable growth," Chief Financial Officer Samir Seksaria said in a press release. "...We remain confident in our ability to continue delivering industry-leading profitable growth," he said. 

 

The company's employee costs rose nearly 1% on quarter to INR 366.5 billion. Total employee headcount rose by 5,726 during Jul-Sept to 612,724, the company said. 

 

The company's trailing 12-month attrition rate for IT services came in at 12.3% compared with 12.1% in Apr-Jun. TCS is continuing to hire more staff in the backdrop of expectations that global information technology spending will see a meaningful revival in Oct-Dec, with interest rates heading lower in several parts of the world. 

 

After the stellar demand seen in the aftermath of the COVID-19 pandemic, information technology companies have struggled with low demand for more than 18 months now. The demand for discretionary IT spending took a hit because of high interest rates, geopolitical tensions, and low corporate sector growth around the world, especially in North America and Europe, which are key high-margin geographies for Indian software services exporters. TCS, too, has seen the impact of this slowdown, with its quarter-on-quarter revenue growth remaining below 2% for the last five quarters. 

 

Chief Executive Officer and Managing Director K. Krithivasan said, "We saw the cautious trends of the last few quarters continue to play out in this quarter as well...Amidst an uncertain geopolitical situation, our biggest vertical, BFSI showed signs of recovery." 

 

TCS' largest vertical, banking, financial services and insurance, saw segment sales rise 3% on quarter to 237.9 billion during Jul-Sept and the segment profit increased over 5%. Brokerage Sharekhan by BNP Paribas noted that the quarter-on-quarter sales growth for the BFSI vertical was 1.9% in constant currency terms. 

 

The brokerage, though noted that deal wins were below the eight-quarter average of $9.6 billion. TCS' total deal wins for the September quarter were at $8.6 billion, lower than $10 billion expected by some analysts. The deal wins were higher than $8.3 billion in Apr-Jun but lower than $11.2 billion in the same quarter of the previous financial year.

 

During the quarter, TCS shelled out INR 40.8 billion in tax expenses, down over 1% from a quarter ago. Depreciation and amortisation expense rose 4% on quarter to INR 12.7 billion.  

 

YEAR-ON-YEAR GROWTH

When compared year-on-year, the company's Jul-Sept performance is better, but not by much. Its bottom line rose 5% on year while sales grew 8%. Analysts had expected the company's net profit to rise 10%, with a sales growth of 7%.

 

The company's consolidated sales were up 5.5% on year in constant currency terms. The growth was led by the manufacturing vertical, which saw on-year improvement of 5% in sales, while the consumer and BFSI segments were muted during the September quarter. 

 

The company's largest market, North America, though witnessed a sales decline of 2.1%, which weighed on the company's margins. The company's operating margin fell 20 basis points from a year ago to 24.1%. During the quarter, revenues from the UK rose 4.6% on year in constant currency terms, while those from India surged 95.2%. 

 

TCS' total expenses rose 8% as employee expenses increased 4% and cost of equipment and software licences soared a massive 599%. Thursday, the company's shares closed at INR 4,227.40 rupees, down nearly 1%, on the National Stock Exchange.  End

 

US$1 = INR 83.96

 

Edited by Deepshikha Bhardwaj

 

 

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