TCS Q1 net down 5.8% to Rs 5,950 cr on sharp rise in rupee

Firm's revenue up 1% to Rs 30,543 cr, operating margin drops to 23.4% from 25.1%

Tata Consultancy Services (TCS) saw its first quarter profit drop 5.8 per cent to Rs 5,950 crore due to currency fluctuations and wage hikes as the banking and financial services and retail businesses slowed.

Revenue grew 1 per cent to Rs 29,584 crore in the quarter to June on the back of volume growth of 3.5 per cent, the highest in four quarters. 

TCS had reported profit of Rs 6,318 crore on revenue of Rs 29,305 crore in the April to June period a year ago. 

A Bloomberg consensus estimate had pegged revenue at Rs 29,570 crore and net profit at Rs 6,201 crore.

The growth was offset by 1.5 per cent due to Rs 650 crore losses in currency fluctuations during the quarter. 

The rupee appreciated nearly 3 per cent against the dollar between April and June. The company also saw wage hikes squeezing the operating margin, which stood at 23.4 per cent. 

TCS had maintained that it would have an operating margin between 26 per cent and 28 per cent.

In the same period last year, the operating margin, calculated as sales minus expenses, stood at 25.1 per cent.

“The revenue is largely in line with my expectation. Margin is slightly lower. But the main concern is the core geographies and verticals are continuing to lag,” said Apurva Prasad, analyst at brokerage HDFC Securities.

However, TCS said the demand environment was positive and it was witnessing growth in developed markets, where the majority of its customers were on annuity.

“In BFSI, we are seeing very strong demand from bottom of the pyramid. We stay optimistic as the pipeline is strong. The growth in our account base of the bottom of the pyramid is strong,” said Rajesh Gopinathan, chief executive officer and managing director of TCS. “Retail is structurally stressed. We are participating in clients’ investments in technology. You should expect volatility,” he added.

TCS’ business in North America, its largest market, grew by 1.7 per cent, while the Europe business grew by 5.6 per cent.

“We see a combination of demand for smaller projects and large transformational deals in insurance. If these materialise we should see a definitive change in the overall environment. Most of our large clients have joined on a twin agenda of changing their technology portfolio and increasing efficiency in their operations,” Gopinathan said.

TCS is the first large Indian information technology services company to announce its results. On Friday, rival Infosys is set to announce its numbers, providing an indication of growth from its investments in newer business such as artificial intelligence and digital technology. Wipro is set to announce its results on July 20.

For TCS, the digital business contributed 18.9 per cent of its revenue, growing 7.6 per cent over the previous quarter and 26 per cent over the first quarter of the previous year. The company also had seven new customers for its Ignio artificial intelligence platform, taking the overall customers to 30. It has trained over 215,000 people in digital skills, which it expects to fuel growth in digital projects.

“When your first quarter execution is at 2 per cent constant currency growth, there is no reason to believe that you will have acceleration later because macroeconomic factors will play out. Because of tailwinds and rupee appreciation, they might be able to do 7.5 per cent rupee growth, constant currency growth will still be lower,” said Madhu Babu, analyst for brokerage Prabhudas Lilladher.

“A 26-28 per cent margin is difficult to retain, if it is 23.4 per cent in Q1, they need to pull very hard in Q2, It is a matter of time, gradually they will cut the margin... 25 per cent is a decent margin for a company as big as TCS,” said Babu. Some analysts as those at Emkay have already cut their FY18 and 19 EPS estimates by 3 per cent and 4 per cent to factor in lower profitability. TCS said the company would not forecast revenue or margins, but maintained that it was seeing a good demand environment for projects.  The company also clubbed the rest of the world, including India, into a category called regional markets, where business is based on projects.

“America, the UK and Australia are more annuity-driven markets so we have clubbed them together, which is about 85 per cent of our business. The project-centric markets like India, Diligenta, Middle East and Japan have been clubbed together into regional markets. These are volatile by nature. This clubbing helps to differentiate the volatility,” said Gopinathan.

TCS had lower  IT services attrition at 11.6 per cent after April’s wage hikes, while it made a gross hiring of 11,200  people during the quarter. Hiring, including trainees, is on in the US.

TCS is setting up a new facility with 25,000 seats in Thane to consolidate its 20 offices in Mumbai. It is shutting down its Lucknow facility and is consolidating in Noida.