TCS Q3 net profit dips 4% to Rs 65.45 billion, meets Street target

The third quarter net profit of Tata Consultancy Services (TCS) dipped 3.9 per cent year-on-year to Rs 65.45 billion, while its revenues grew 2.7 per cent to Rs 317.7 billion as the software bellwether met Street expectations. 

The in-line performance in a seasonally soft quarter was on the back of large deals and increasing contribution in digital verticals from clients such as Nielsen and Rolls Royce.

The country’s largest IT services firm said on Thursday it recorded 39 per cent year-on-year growth from digital deals as it engaged with clients in retail and banking. The digital vertical makes up for 22.1 per cent of its revenues.

The outperformer among verticals was retail and consumer products which posted a growth of 6.4 per cent on a sequential basis. The segment has been a laggard in three of the last six quarters. 

On a constant currency basis, the company posted a sequential growth 1.3 per cent, largely driven by volumes (up 1.6 per cent), even as it continues to face pricing pressures. It added 94 customers in the December-ended period.

TCS is the first large Indian IT firm to declare results, setting the stage for other companies to report their quarterly performance.  Infosys, which has seen Salil S Parekh take over as  the new CEO in January, will report its third quarter results on Friday. On margins, TCS has also been able to improve its profitability (by 10 basis points) to 25.2 per cent for the quarter. This is, however, lower than the company’s target band of 26-28 per cent. Employee addition stood at 1,667, taking the total headcount to 390,880.

 

Analysts say while TCS has met expectations in a traditionally weak quarter and has been able to maintain margins,  the question arises whether the company has over-used the leverage by hiring lesser people than needed.

“Overall numbers are in line. Revenue from digital business has grown 13.9 per cent sequentially. In the first nine months, they hired around 3,600 people as against 24,000 people (in the same period) last year. They are going very slow on hiring to maintain margins,” said Madhu Babu, IT analyst at brokerage Prabhudas Lilladher. “Now that the hiring lever has already been utilised, it should be seen how they will sustain margins.”

India’s IT industry witnessed a jobless growth in 2017 as clients cut budgets on traditional services, which contribute four out of five dollars they earn and spent them on newer areas such as digital and cloud. The firms took to shedding flab and focus on retraining thousands of engineers in the newer areas to meet client needs. The fallout was the near absence of Indian IT firms in college campuses to hire fresh graduates.

TCS says the year ahead will be positive and sees higher growth than in the year gone by. “Overall business confidence across many verticals is improving. Take retail, during the holiday season many traditional retailers such as Home Depot and Best Buy showed better performance by leveraging digital,” said Rajesh Gopinathan, CEO and MD of TCS.  Home Depot and Best Buy are large box traditional retailers in the US.

Among other verticals, energy and utilities grew higher at 8.5 per cent, while banking, financial services and insurance (BFSI), disappointed.

“The market believed that digital will drive smaller deals, renewals will be small and deal terms will reduce. (But) we got the largest deal and it was an incremental renewal and is an eight-year contract. It’s time for us to step back and think what's going on here,” said Gopinathan.

He said retail had bottomed out and TCS was seeing a turnaround in banking, financial services and insurance (BFSI) vertical with demand coming back from clients. How the revenues from this segment moves will be critical as it contributes a third to overall revenues and is by far the largest of its verticals. The management was cautious about banking and financial services prospects in the US, its largest market. It believes it will take a couple of quarters before there is clarity on investments by the larger financial institutions. The firm has seen growth faster from Europe, largely with spending from banking customers in the region, which could make it the biggest market for TCS after the United States.

"It looks like the revenue from the Diligenta deal hasn't started coming in yet and the management did not give any clarification on when that may happen. Seems like the large traditional deals have not been growing fast enough and we can only hope that they will pick up," said Ravi Menon, IT analyst at brokerage  Elara Capital. 

N G Subramaniam, chief operating officer at TCS, said the company would see revenue accrual from deals from Rolls Royce, Marks & Spencer and Nielsen from the fourth quarter beginning January.

Last month, TCS renewed $2.25-billion contract from television rating firm Nielsen and won a mandate with British engine maker Rolls Royce to work jointly in digital engagements.

"New deal ramp-ups, increasing traction in digital, robust demand pick up in retail and continuing momentum in most of our industry verticals gave us strong volume growth in a seasonally weak quarter. Our reputation for superior execution, combined with our platform capability, positions us well to close mega deals," Subramanian said in a statement.

TCS had reported profit of Rs 68.14 billion on revenues of Rs 313.60 billion in the third quarter last year.

TCS, which reported numbers after market hours, saw its stock price dropping 0.67 per cent to close at  Rs 2788.40 on the Bombay Stock Exchange. The S&P BSE IT index closed 0.84 per cent up at 11696.30.