The country’s largest information technology (IT) services company, Tata Consultancy Services, earned its highest-ever net profit of Rs 8,105 crore in the seasonally weak third quarter (Q3) of 2018-19 (FY19). This was in line with market expectations, though revenue and operating margins missed consensus estimates narrowly.
This is the first time TCS’s net income has crossed the Rs 8,000-crore mark. The Mumbai-headquartered company’s profit grew 24.1 per cent year on year (YoY) and 2.58 per cent sequentially.
The management said it was confident of posting double-digit revenue growth in the full year, along with meeting the margin target on the back of a strong order book coupled with momentum in the key banking, financial services and insurance (BFSI) vertical, especially in the US. In the December quarter, its revenue grew 20.8 per cent to Rs 37,338 crore, the highest in the past 14 quarters. In constant currency terms, revenues rose by 12.1 per cent YoY and 1.8 per cent sequentially.
A Bloomberg poll of analysts had predicted its revenue and net profit to be Rs 37,914 crore and Rs 8,190 crore, respectively, in the Q3FY19. In dollar terms, the company’s revenues grew at 9.7 per cent YoY to $5.25 billion. Sequentially, dollar revenue grew by 0.67 per cent. The YoY numbers fell short of the double-digit growth that the IT firm had recorded in the first two quarters of this financial year.
“We had a fairly strong quarter during a seasonally weak period as we are wrapping up 2018 with a strong revenue growth of 12.1 per cent in the December quarter, which is the highest in 14 quarters,” said Rajesh Gopinathan, chief executive officer and managing director, TCS. According to the company, its digital revenues grew 52.7 per cent YoY and constituted 30 per cent of its total revenue in the quarter, as compared to 28 per cent in the previous quarter.
The major highlight of TCS’s financial numbers was a 90 basis points (bps) dip in it operating margins on a sequential basis at 25.6 per cent, which was largely owing to cross-currency headwinds and higher subcontractor costs. On a YoY basis, margins expanded by 40 bps.
“Sub-contractor costs were high due to seasonality and market demand. Almost 60 bps impact on margins came from sub-contracting costs,” said Gopinathan.
The company, which now has an operating margin of 25.7 per cent on nine months basis of this financial year, said it was well-placed to meet its guided range of 26-28 per cent.
“We are very close to the lower side of our guided range. So, we remain focussed on our target,” said V Ramakrishnan, chief financial officer at TCS.
“The surprises in TCS’ performance were: First, the slightly lower margin performance and the above-expectations deal total contract value of $5.9 billion. Legacy drag is still a bit of worry but the overall digital growth and deal wins make it look poised to end the year on double-digit growth,” said Amit Chandra, research analyst, HDFC Securities.
Among the verticals, BFSI continued to grow for the fourth consecutive quarter with strong demand from the US despite, some weakness in Europe and the UK. In the third quarter, the BFSI vertical grew 8.6 per cent YoY, constituting about 31 per cent of its total revenue.
Other verticals which supplemented to the TCS’s growth include energy & utilities that grew at 18 per cent and life Sciences & healthcare at 15.7 per cent, on YoY basis. Retail and CPG vertical also picked up growth momentum with double-digit growth in this period. TCS also saw a huge jump in its deal pipeline signing contracts worth $5.9 billion in the quarter as compared to $4.9 billion reported in Q2 of FY19. The company signed deals worth around $3 billion in the US alone.
Among geographies, while US witnessed a growth of 25.1 per cent in Q3, Europe grew around 17 per cent on YoY basis.
After going slow for some quarters, TCS saw a net addition of 6,827 employees in the third quarter taking the total employee addition in the past 12 months to almost 27,000, an all-time high, taking the total headcount to 417,929 at the end of December quarter. The employee attrition however saw a marginal increase of 30 bps sequentially at 11.2 per cent. Its total headcount stood at 417,929 by the end of December quarter.
The company’s share price ended flat at Rs 1,888.15 on Thursday when the benchmark index fell marginally by 0.29 per cent to Rs 36,106.5. The company has declared its third interim dividend of Rs 4 per share.