TCS: A tad short but steady outlook

Unsustainable forex gains aided growth, cost efficiencies helped offset one-off payment to staff

Higher forex gains and margin improvement compensated for the weak revenue growth posted by Tata Consultancy Services (TCS) in the March quarter (Q4). A weak show in three verticals - insurance (particularly that of Diligenta acquisition), telecom and energy - affected the revenue growth. The weakness in these ate away nearly half of TCS' sequential volume growth.

This metric stood at 1.4 per cent in the quarter. Notably, constant currency revenue growth has fallen short of expectations in the past three-four quarters and stood at 1.6 per cent in Q4 quarter, again short of some analysts' expectations of about 2 per cent.

These expectations were already toned down, as the company management had earlier sounded off the Street about possible headwinds in business for the quarter and was expecting this metric to grow 1.9-2 per cent sequentially. Clearly, the headwinds were higher than expected. Positively, if these three troubled sectors are excluded, the volume growth stood at 2.7 per cent, healthy and higher than many analysts had estimated. Cross-currency headwinds also impacted dollar revenue growth, of 270 basis points.

Thus, revenues stood at Rs 24,220 crore, slightly short of consensus Bloomberg expectations of Rs 24,540 crore.

Operationally, though, performance was better. Excluding the one-time bonus of Rs 2,628 crore to employees to mark the 10 th anniversary of TCS' listing, the operating profit margin increased 18 basis points sequentially to 27.2 per cent. That's despite a 48 basis points hit on account of unfavourable cross-currency moves. Slightly better realisations, better offshore mix and operational efficiencies aided margin expansion.

Net profits, however, got a boost from higher than expected forex gains of Rs 663 crore, leading to a 79 per cent sequential jump in other income to Rs 1,129 crore. This, with a marginal decline in effective tax rate, enabled better than expected net profit. TCS' adjusted net profit (excluding employee bonus) stood at Rs 5,906 crore versus consensus Bloomberg estimates of Rs 5,388 crore.

The management, however, sounds confident of sustaining the margins within its earlier stated band of 26-28 per cent. While the pricing environment is stable, it said the earlier levers are available to sustain profit margins. More important, the demand environment remains healthy and client sentiments remain positive.