Margin pressures dent TCS June quarter show

Revenues are expected to grow in the 7.5-8% range for the year

Tata Consultancy Services’ June quarter results were less-than-expected with operating profit (EBIT) margin and net profit hitting their eight-quarter lows at 23.4 per cent and Rs 5,950 crore, respectively. Revenue was down 0.2 per cent sequentially at Rs 29,584 crore. In constant currency terms, it grew 2 per cent, led by a healthy 3.5 per cent growth in volume, but impacted by a 1.5 per cent decline in realisations. Net profit was down 10 per cent sequentially and was lower than the Bloomberg consensus estimate of Rs 6,201 crore.

TCS indicated that while realisations will be flat annually, there will be volatility in quarterly basis. Also, it does not indicate any pricing pressure. 

While some pressure on margins on account of higher wage costs was factored in, the fall was more than anticipated. The margins at 23.4 per cent (expectations of 24.1 per cent) were 170 basis points (bps) lower than the year-ago period and 233 bps sequentially. TCS highlighted a 150-bps hit on account of wage hike and 80-bps hit due to a stronger rupee for the fall in margins. Given employee exits, TCS, according to analysts, had to give significant salary hikes to existing employees to retain them. Higher visa costs also impacted the margins.

While TCS has indicated that it would focus on operational efficiency and automation, analysts believe it would be tough given the high cost base. Analysts peg annual margins to be at around 25.3 per cent levels, lower than the 26-28 per cent band (excluding currency impact) indicated by the IT major. On the revenue front, barring retail and BFSI (banking, financial services and insurance) verticals, most of the other verticals grew at about 4 per cent or more. Even in the retail and BFSI verticals (45 per cent of revenue), there has been an improvement (over 2 per cent growth) compared with a 2-4 per cent fall in Q4 FY17 on a constant currency basis. Analysts expect a similar growth trend in the September quarter. While most verticals have been growing well, retail, telecom and energy utilities have been the concern areas. The situation is unlikely to improve any time soon.

Analysts are positive on the BSFI sector and expect discretionary spends to come back given the improving performance of the US banks and other financial services players. The key driver for TCS, both from the revenue and margins front, is the pace of growth from digital services segment (18.9 per cent of revenue). While TCS continues to invest in capabilities to tap the sector, it will be some time before the improvement can reflect in revenues and realisations, which are better than the traditional legacy systems (80 per cent of revenue).