TCS beats Street estimates in Q2, net rises 8.4%; attrition remains high

IT major Tata Consultancy Services (TCS) beat estimates on profit and growth in the second quarter of financial year 2022-23 (Q2FY23) as it continued to see strong demand for its services. It reported a net profit of Rs 10,431 crore, which was a rise of 8.4 per cent year-on-year (YoY) and 10 per cent sequentially.

Buoyed by good performances across geographies and verticals, revenue grew 18 per cent YoY to Rs 55,309 crore. It grew 4.8 per cent sequentially.

The Q2 numbers topped Bloomberg estimates, which had pegged revenue at Rs 54,932 crore, and net profit at Rs 10,294 crore. In US dollar terms, revenue grew 4 per cent sequentially in constant currency.

While revenue, PBIDT (profit before interest, depreciation, and tax), and net profit figures for Q2 were the firm’s highest ever, according to Capitaline data, this was also the first time that net profit crossed Rs 10,000 crore.

Surprisingly, both its major markets – the UK and Europe – defied a pessimistic economic outlook, and it posted strong sequential growth in the regions in Q2, the company said. The retail sector posted the highest growth of 22.9 per cent YoY.

“The growth this quarter has come with good profitability. We have been able to improve our operating margins by 90 basis points. Importantly, this quarter comes on the back of five quarters of consistent growth,” said Rajesh Gopinathan, chief executive officer and managing director, TCS.

However, the management added a note of caution on Europe. “We need to remain very vigilant and cautious in interaction with clients. We do see an increasing sense of caution in the discussion that we have but it has not yet materialised in our order pipeline,” added Gopinathan.

The firm reported total contract value (TCV) of $8.1 billion, which was slightly lower than $8.2 billion signed in Q1. The TCV did not have any large deals as these deals were taking time to close. The company is, however, confident that it will retain its TCV in that range. N Ganapathy Subramaniam, chief operating officer and executive director, said it is only natural to expect some softness given the macro environment, especially in Europe.

Analysts were upbeat on the performance.

Sanjeev Hota, head of research at Sharekhan by BNP Paribas, said: “TCS has delivered a resilient performance amid macro uncertainties and beat modest expectations both on revenue and margins. Also, management commentary on both the demand environment and margins trajectory looks comforting.”

Hota added that TCS has the bandwidth to stay relevant. “However, global macro uncertainties would keep the stock performance volatile in the near term, investors should use the material weakness in the stock to ‘buy’ for long term,” he said.

Attrition

Though the company did well on other parameters it continued to see a rise in attrition at 21.5 per cent. This was higher than 19.7 per cent reported in Q1. Milind Lakkad, chief human resources officer, said it will take another three to four quarters to see attrition below 20 per cent. However, on a quarterly basis, the company expects attrition to reduce by next month.

On moonlighting, the company said it has not taken any action so far, but it is clearly against the ethics of the company. “Moonlighting, we believe, is an ethical issue and is against TCS’ core values and culture,” he added. Gopinathan said it is codified in the firm’s employment contracts that employees are not allowed to work for another employer.

On the margin front, the company saw an improvement of 90 basis points as it reported a reduction in sub-contracting in Q2. Samir Seksaria, CFO, said margins will come back to 25 per cent by Q4.