TCS beats the Street with strong numbers

Says jury verdict in Epic Systems' case won't impact financial results

Though the impact of the US jury verdict in the Epic data theft case was clearly seen to be having an overhang among the top management of Tata Consultancy Services (TCS), the Mumbai-based company tried to bury those with a good set of numbers.

After its Indian peer Infosys stole the limelight last week with a strong performance in the quarter ended March, TCS also beat the Street’s estimates with better-than-expected profits and revenues.

Read more from our special coverage on "TCS"

• No major impact due to US fine notice
• TCS Q4 in line with estimates, better than Infosys on several parameters
• TCS Q4 profit rises 3.8% at Rs 6,341 cr
• TCS shares down over 3% on $940 mn fine ahead of earnings
• Heres what to watch out for in TCS Q4 earnings

India’s largest information technology services provider TCS’ fourth-quarter net profit at Rs 6,341 crore was up 64.4 per cent, year-on-year, and 3.8 per cent sequentially. Revenue at Rs 28,449 crore was up 17.5 per cent, year-on-year, and four per cent, quarter-on-quarter.

The revenue was in line with Bloomberg estimates and net profit beat expectations.

TCS reported dollar revenue growth of 1.5 per cent sequentially and 2.1 per cent in constant currency. Infosys reported dollar revenue growth of 1.6 per cent sequentially and 1.9 per cent in constant currency.

By volume, TCS managed to beat Infosys, with a growth rate of 3.2 per cent against 2.4 per cent.

“We are ending the year on stronger terms. Our core portfolio performed strongly in a seasonally weak fourth quarter, driven by volumes in financial services, retail and manufacturing. Our investments in building platforms are paying off, resulting in over $2.3 billion digital revenue,” said N Chandrasekaran, managing director and chief executive officer, TCS.

TCS’ operating margin contracted by 50 basis points to 26.1 per cent, owing to currency volatility and a drop in realisation.

“In 2015-16, our focus was on delivering an industry-leading financial performance, with our ongoing investment programme designed to capture evolving digital demand. We have invested over $250 million in our digital businesses and in new markets,” said Rajesh Gopinathan, chief financial officer, TCS.

At the end of the quarter, the company’s digital revenue was 15.5 per cent, up 52 per cent, year-on-year, in constant currency.

The most important takeaway from the management comments was that the headwinds pulling the company’s performance down for the last six quarters had abated.

“The company is responding to price aggression from peers. Problem segments like Diligenta and Japan are likely to be less of a drag on revenue in 2016-17,” said a note from UBS.

For the full year, TCS’s net profit grew 23.2 per cent to Rs 24,215 crore and revenue was Rs 1,08,646 crore, up 11.9 per cent.

The financial services business grew 3.2 per cent, retail and distribution 2.1 per cent, and manufacturing 3.9 per cent.

The quarter saw the Latin America business clocking growth of 1.8 per cent and North America 2.4 per cent. While the UK business was down 0.4 per cent, continental Europe was up 3.6 per cent.

Revenue from India crossed $1 billion although the company said business in the region was cyclical and it was focusing on government contracts.

During the quarter, TCS signed seven large deals in six business verticals. Clients in the $100-million revenue band went up by three, in the $50-million band by eight, and in the $10-million band by 17.

TCS’ attrition rate for IT services was 14.7 per cent. During the quarter, there was a gross addition of 22,576 employees and net addition of 9,152, taking TCS’ headcount to 353,843.  

TCS also announced a wage hike for FY17. The range will be between 8-12 per cent, with 12 per cent going to high achievers. On-site hikes will be in the range of two to four per cent.  

The IT major, which has been one of the largest hirer in the industry, also said that its gross hiring for FY18 will go down due to automation. “For FY17, we have given offer letters to 45,000 students. We think our lateral recruitment will be much lower,” said Chandrasekaran.

Some of the reasons other than automation include falling attrition and significant opportunity to increase productivity.

On the verdict by the court of Western District court of Madison in Wisconsin in the Epic Systems data theft case, the company said while awarding $940 million (Rs 6,227 crore) damages to be paid by TCS, the trial judge also indicated the court’s intent to reduce the fine. The court said while the verdict does not have any impact on the financial results of the company, the company has considered it as a ‘contingent liability’.

After dropping initially to touch the day’s low of Rs 2449, the share prices of TCS subsequently recovered to end flat at Rs 2522.40, at the end of the day’s trading on the Bombay Stock Exchange on Monday. “TCS has stated there are no immediate financial consequences of the adverse verdict and that its Q4 result remains insulated.  However,  we  believe  the  verdict  is  a  sentimental  negative  and  will  adversely  impact  the  company’s  ability  to  win  new  business in the near term,” brokerage firm Edelweiss said in a note.