Tata Consultancy Services (TCS), India’s largest information technology (IT) services firm, not only posted better-than-expected results for the quarter ended December 2020 (Q3) — its strongest third-quarter result in nine years — but also surprised many by indicating that it could return to a double-digit growth trajectory next year.
The indication of the future growth trajectory from a company that refrains from giving guidance itself is a positive. The company had last witnessed double-digit sales growth on a year-on-year (YoY) in the June 2019 quarter.
The firm’s revenue and net profit increased by 5.4 per cent and 7.2 per cent on a YoY basis to Rs 42,015 crore and Rs 8,701 crore, respectively, for the quarter under review. Analysts polled by Bloomberg had estimated the company to post revenue of Rs 41,231 crore and net profit of Rs 8,594 crore for the December quarter. The performance was driven by strong growth in all its key business segments and geographies. The company’s solid performance in a seasonally weak quarter was better than Street estimates and the company said it had achieved its internal revenue and margin targets on schedule. “The results are encouraging and positive across all parameters,” said Rajesh Gopinathan, chief executive officer and managing director, TCS, in a post-results interaction. The firm bagged $6.8 billion worth contracts in the third quarter.
TCS’s revenue in Q3FY21 was aided by a ramp-up in large deals. On a constant currency basis, the revenue growth was 4.1 per cent quarter-on-quarter (Q-o-Q) and 0.4 per cent YoY.
The revenue growth was led by the banking and financial services vertical, which grew 2 per cent and 2.4 per cent QoQ and YoY, respectively, on a constant currency basis. The segment contributes 30 per cent to the IT major's revenue. The North America market, which contributes half the company revenue, saw 3.3 per cent Q-o-Q growth.
TCS’s earnings before interest, depreciation, tax and amortisation (Ebitda), or operating profit, for the quarter was Rs 11,184 crore, up from Rs 9,974 crore, an increase of 12.1 per cent YoY.
Operating profit margins in Q3 stood at 26.6 per cent, a rise of 160 basis points YoY, and were ahead of market expectations. On average, analysts had pegged the figure around 25.4 per cent, indicating that TCS was ahead of expectations on this parameter too.
While the company took a salary hike in October it was able to offset the costs due to operational efficiencies resulting in margin improvement. A reduction in travel spends and sub contracting costs too is believed to have helped the company.
“Growing demand for core transformation services and strong revenue conversion from earlier deals have driven a powerful momentum that helped us overcome seasonal headwinds and post one of our best performances in a December quarter,” said Gopinathan.
"We are entering the new year on an optimistic note. Our market position stronger than ever before, and our confidence reinforced by the continued strength in our order book and deal pipeline," added the company's CEO & MD.
Analysts see the results with optimism.
"This quarter is a turning point and its good to see finally positive YoY growth at TCS. Things will be better from here on because of digital and cloud acceleration as well strong deal momentum for cost take outs. The good part is that TCS growth is balanced across verticals and geographies thus giving hope for sustained momentum going forward," said Pareekh Jain, founder and lead analyst, EIIRTrend, an outsourcing research and advisory.
TCS shares closed 2.9 per cent higher at Rs 3,120.35 on the BSE, ahead of its results.