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TCS Q2 profit up 8.4% but below market view; co sees better H2

Press Trust of India  |  Mumbai 

Software major today reported a lower-than-expected 8.4 per cent rise in net profit at Rs 6,586 crore for July-September but expressed optimism that rest of the fiscal would be better than the past many years and first half of this year.

The consolidated revenue grew nearly 8 per cent to Rs 29,284 crore for the said quarter as against Rs 27,165 crore in July-September 2015.

Describing the second quarter as an extremely "unusual" one for the company, managing director and chief executive N Chandrasekaran said, "I expect the Q3 and Q4 to be better than the similar quarters in the past many years and also the first two quarters as we expect most of the delayed project orders in Q2 to become materialised in the second half".

"Of particular importance is the Rs 180 crore worth of contracts from the country which should have been executed in Q2. I hope this to be done in Q3," he said.

He also said that the country's largest company in terms on m-cap also expects to maintain margins, which jumped 130 bps to 26 per cent in the reporting quarter to be in the range of 26 to 28 per cent through the rest of the current year.

But analysts said this 1 percentage point rise in revenue growth is the lowest in the history of TCS, and the overall numbers are also much below the street expectation.

"missed expectations on revenue growth badly which is the lowest sequential growth in its reporting history in an otherwise usually strong period," Emkay Global said in a note.

Angel Broking also said the overall numbers are below its expectations though the margins and net income were much higher than forecast.

Traditionally, the second half of every year, especially the third quarter, is the worst for software companies in the country.

Incidentally, Chandrasekaran's optimism comes admist the uncertainties about the outcome of the forthcoming American presidential polls scheduled for November 8 wherein the Republican hopeful Donald Trump has threatened to end outsourcing and put up many trade protectionist measures if elected to the White House. The US is the largest market for any domestic software exporter.

It also comes after British Prime Minister Theresa May's statement that she would begin the Brexit process in a hard manner from March. reported a marginal dip in its income from Britain in the reporting quarter.

Chandrasekaran, expects these two events not to have any serious impact on his business as "tech spending is a necessity in today's world and at best some clients may delay investments in technology and digital interfaces.

"This, to me is true even of banking and financial sector

clients, which has been soft in the reporting quarter and expects to be so in the remaining parts of the current fiscal year. Having said that I am not in a position to gauge the impact of these events on the macro front," Chandrasekaran said.

He said that "growing uncertainties in the environment" are creating caution among customers and "resulting in holdbacks in discretionary spending" and blamed the tepid numbers to volatility in markets like India and Latin America.

The battered British pound also played its part post the Brexit vote, chief financial officer Rajesh Gopinathan said, adding from an average of Rs 95 to the pound last year, the British unit is tracing at Rs 87 now and it expected to plunge another 7-8 per cent as the island nation moves closer to the exit.

Chandrasekaran said the quarter was "good" from a profitability perspective "where despite multiple headwinds, our disciplined approach and focus on operations have helped us deliver a strong margin performance".

"With technology increasingly at the forefront of business, we are confident that this is temporary... Over 1m80,000 TCScians are now trained with significant expertise in new digital technologies," he said.

Compared to June quarter, net profit was up 4.3 per cent, but revenue declined marginally in the quarter, which is considered to be a strong one for the industry.

Growth was led by life sciences and healthcare, which grew at 4.7 per cent sequentially in constant currency terms, followed by energy and utilities (up 3.6 per cent).

Europe led the growth chart with a strong 3.7 per cent jump in revenues followed by Asia-Pacific at 3.5 per cent sequentially in constant currency while North America grew 1.4 per cent sequentially and Britain was flat with a negative bias.

Its home market declined by 7.6 per cent sequentially as orders worth Rs 180 crore got pushed to the third quarter, while Latin America and Japan also continued to show volatility, Chandrasekaran said.

The company added 22,665 employees on a gross basis and 9,440 on a net basis, taking its total headcount to 3.71 lakh as of September end, Chandrasekaran said, adding in terms of arresting the attrition levels this quarter was the best at 11.9 per cent.

Shares of TCS fell by over 2 per cent today ahead of its second quarter earnings, which were announced after the market hours.


The country's largest software exporter said its operating margins rose 94 bps sequentially to 26 per cent a tad over 25 per cent in the past quarter, helped by digital revenues that rose 16.1 per cent.

Chandrasekaran said the way forward is digital and the Internet of Things.

On client addition, Chandrasekaran said the company could not add any USD 100 million client in the quarter, instead it lost one as the client had divested the business it was working with during the quarter.

During the quarter, TCS added one USD 50 million plus client and six USD 20 million plus clients, he said.

Gopinathan said growth was led by life sciences and healthcare which grew at 4.7 per cent sequentially in constant currency followed by energy and utilities (up 3.6 per cent), manufacturing (up 3.1 per cent), travel & hospitality (up 2.3 per cent) and communication and media which grew 2 per cent.

The company said its total employee strength rose to 3,71,519 on a consolidated basis with gross addition of 22,665 and net addition of 9,440.

Total attrition rate fell to 11.9 per cent in IT services and was at 12.9 per cent including BPS. The percentage of women employees 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. The process of on-boarding this year's campus trainees continues at the normal pace," said HR head Ajoy Mukherjee.

First Published: Thu, October 13 2016. 20:14 IST