TCS: Revenue growth disappoints again

Better margins, forex gains enable TCS to post a better net profit

Tata Consultancy Services (TCS)’ constant currency revenues fell short of expectations for the June quarter as well. This metric grew 3.5 per cent sequentially compared to the Street expectations of 4-4.2 per cent in a seasonally strong quarter. Notably, this is the third straight quarter where the company has witnessed pressure (or missed) on its revenues.

Attrition went up to 15.9 per cent, something the Street will take note of.  Even as Diligenta (TCS’ UK-based insurance arm) continues to fall and is likely to see a lumpy performance in the near term; weakness in Japan and Latin America has pulled down revenue growth. Although telecom, which forms 8.6 per cent of revenues, grew at a robust 9.6 per cent sequentially in the quarter, it is largely due to the low base. In the March quarter, telecom revenues had fallen 10.2 per cent. It is expected to remain volatile and will be a key monitorable.

TCS is the bellwether for the Indian information tecnology sector and the Street had pegged its constant currency revenue growth ahead of peers such as Infosys, Wipro and HCL. It will be keenly watching if any of these companies can grow this metric better than TCS.

 

A 150 basis points fall in realisations weighed on the top line. However, the management has indicated that pricing continues to be stable, given that realisations are a function of a host of factors such as offshore revenue mix, among others. The Street, though, might keep this on the watch as well.

A favourable rupee, however, aided consolidated revenues at Rs 25,668 crore (up six per cent sequentially) and, hence, came largely in line with Bloomberg consensus estimate of Rs 25,670 crore.  

Lower-than-expected contraction in Ebitda (earnings before interest, tax, depreciation and amortisation) margin and forex gains (Rs 190 crore) enabled TCS to post a better net profit in the quarter. The quarter witnessed full impact of wage hikes. This was partly offset by a favourable rupee (positive 70 basis points) and operational efficiencies (30 basis points).

Thus, Ebitda margin contracted 110 basis points sequentially to 28.1 per cent versus analysts’ expectations of 198 basis points sequential contraction. As a result, profits at Rs 5,709 crore were better than estimates of Rs 5,509 crore.

The results of TCS, which fell 3 per cent on Thursday, came post-market hours. At the closing price of Rs 2,521, the scrip trades at a premium valuation of 20 times the FY16 estimated earnings. However, most analysts remain positive.