Corona blues: TCS Q1 caught in a viral storm, net profit falls 13%

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Published: July 10, 2020 2:20 AM

In terms of geographies, Europe, which was on a significant growth trajectory, continued to maintain momentum albeit impacted by the pandemic.

Despite the sharp decline in revenues and profit, the TCS management is confident that the situation would turn positive by the third quarter.Despite the sharp decline in revenues and profit, the TCS management is confident that the situation would turn positive by the third quarter.

Tata Consultancy Services, the country’s largest software services exporter, reported a sharp contraction in revenues and earnings during the June quarter of the new fiscal, as the Covid-19 pandemic hit hard. The company missed the Street’s estimates on all fronts. Its net profit fell a sharp 13% sequentially to Rs 7,008 crore and missed the Bloomberg consensus estimate of Rs 7,683 crore. Revenues declined 4% sequentially to Rs 38,322 crore, which was also below the Bloomberg consensus estimate of Rs 38,865 crore. Despite the sharp decline in revenues and profit, the TCS management is confident that the situation would turn positive by the third quarter.

In the constant currency (CC) terms, revenues declined 6.3% on a year-on-year basis, while the sequential decline was at 6.9% during the quarter. The management said it was on expected lines. The impact of currency further accentuated it from dollar perspective. Rajesh Gopinathan, CEO and managing director, TCS, said that the revenue impact of the pandemic played out broadly along the lines the company had anticipated at the start of the quarter. “It affected all verticals, with the exception of life sciences and healthcare, with varying levels of impact. We believe it has bottomed out, and we should now start tracing our path to growth,” he said.

Operating margins during the quarter stood at 23.6%, a decline of 150 basis points sequentially. The company reported an operating income or Ebit (earnings before interest and tax) of Rs 9,048 crore, a 10% sequential decline. It was below analysts’ estimates of operating income of Rs 9,443 crore. The decline in margins was commensurate with the decline in revenues witnessed by the company, the management said.

However, Gopinathan maintained that the company’s visibility into Q3FY21 was better compared to the fourth quarter of last fiscal. “We should be year-on-year positive in Q3FY21 in INR terms and getting close to it in constant currency terms, and probably breaking even on a y-o-y basis in constant currency by Q4. Compared to the global financial crisis, it is similar to what we had said the impact is steepest in Q1 and we should then see recovery. If the current expectations play out, the recovery trajectory from here will be faster than the recovery trajectory post-GFC. This is primarily because response to the crisis from various governments and institutions has been extremely coordinated and we should see the benefit of it coming.”

Gopinathan had said while exiting FY20 that the company would get back to where it was in Q3FY20 by the time it got to Q3FY21. Exit rate of Q4FY21 would be similar to where it was in Q4FY20. He said that in terms of customers, the company ended the quarter with 48 deals in the $100-million band. He said that the actual connect with the customers had increased significantly during the quarter.

On a segmental perspective, the quarter was in line with expectations, he said. The life sciences, healthcare, pharmaceuticals verticals continued to maintain growth trajectory and were growing in mid-teens numbers growing at about 13.8%. Most of the other verticals have been impacted due to the overall economic impact of the pandemic. The company’s largest vertical, banking and financial services and insurance, saw a 4.9% decline in revenues, however, insurance fared better, followed by capital markets and banking which were seeing a short-term impact and would recover in the second half of the year. “Retail and hospitality have seen the maximum impact. The demand destruction in this vertical is significant,” he said.

In terms of geographies, Europe, which was on a significant growth trajectory, continued to maintain momentum albeit impacted by the pandemic. The US was among the most impacted. Overall, the sheer magnitude has been high with the year-on-year revenues reducing 6.1% to $2.6 billion for the quarter. Meanwhile, the UK market was affected by the twin impact of Bexit and the Covid-19 pandemic.

On the hiring front, Gopinathan said, “Looking at the uncertainty, the company has frozen lateral hiring but the company will honour all outstanding offers.” He said the company was actively contacting all the 40,000 offers that it had made an engaging with them and preparing them to on board July onwards. “Looking forward, depending on the demand environment, we have also decided to selectively open up lateral hiring and started onboarding new associates,” he said.

Meanwhile, TCS has called the recent visa proclamations in the US as “unfortunate and unfair”. Milind Lakkad, chief human resource officer, TCS, said, “The proclamation is unfortunate and unfair from our point of view. Business terms, in the short term, we will have some impact, but considering our strong supply and delivery system in the US and with our customers adapting to location independent model, we will be able to manage this situation in the short term.” However, in the long-term, depending on how the situation evolves, the company “anticipates challenges from a sourcing perspective as a fair share of students in the system are international students”.

He added, “It is important for all the stakeholders to understand that the proclamation is causing enormous amounts of uncertainty and anxiety to all.”

He also said that currently only 1% of the company’s workforce is working from office and customer locations. “We will be conservative in bringing people to work and it will vary with the Covid situation in each country and the city,” he said.

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