TCS results top estimates but no big surprises

Slowing growth of BFSI vertical and fall in margins are the key points to note

It was another quarter when TCS (Tata Consultancy Services) did not disappoint the Street with its June quarter (Q1) revenue growing three per cent sequentially to Rs 29,305 crore, ahead of the Bloomberg estimate at Rs 29,251 crore. Net profit (Rs 6,317 crore) was near the March quarter number but ahead of Bloomberg estimate of Rs 6,063 crore.

According to Sarabjit Kour Nangra  of Angel Broking, net profit growth was higher than expected on earnings before interest and tax (Ebit) and other income.  Volumes growth at over three per cent and incremental revenue added at $115 million are encouraging. Expecting good results, the stock was up  one per cent on Thursday. Not much spill-over is expected on Friday.

For one, Ebit margins declined 100 basis points sequentially to 25.07 per cent in Q1 and against the Bloomberg estimate of 27.3 per cent, the disappointment is huge. Rajiv Mehta of IIFL says it is natural for Ebit margins to look depressed in Q1, as the company incurs higher costs on visas and salary increments. But, margins were also below the earlier management forecast, 26-28 per cent.

Likewise, the banking, financial services, and insurance (BFSI) vertical ( largest revenue contributor) posted quarter-on-quarter revenue growth of only 1.7 per cent. “Given the BFSI vertical is now beginning to account for 40 per cent of total revenues, a high base effect is setting in,” an analyst says. The Street might have to brace for some growth moderation in this vertical as global uncertainties tighten their grip on the BFSI sector.

After two quarters of fall in revenues, the UK region showed improvement in Q1, with sequential revenue growth of 3.8 per cent. This was the highest growth posted by any region outside India, while Indian revenues grew 8.5 per cent quarter-on-quarter. While analysts say these are positive, questions over sustainability crop up. The management said India growth will remain good in the near term, but did not rule out volatility in emerging market revenue growth.

As regards the UK, while the management has not received any negative reports from its clients, it is adopting a wait-and-watch strategy for this region. This will be another area the Street will keep an eye out for as the UK and Continental Europe account for a fourth of TCS revenue. The positives: Improving volumes from consulting, digital and analytics businesses, and higher growth consistently being shown by the digital business. Many geographies and verticals posted healthy growth. These give some comfort.