Slowdown in banking and financial services, delayed deal closures in retail segment hampered growth.
Tata Consultancy Services (TCS),the country’s largest IT services major, on Thursday reported a disappointing set of numbers for the September ended quarter, missing analyst estimates on all fronts. Revenue in dollar terms remained subdued and increased 0.6% quarter-on-quarter to $5.5 billion, which was below consensus estimates of 2.2%. While the slowdown in the banking and financial services (BFSI) segment continued, delayed deal closures in the retail segment hampered growth.
The consolidated net profit for the three months of July-September declined 1% q-o-q at Rs 8,042 crore, and was much below Bloomberg consensus estimates of Rs 8,304.2 crore. This was on account of operational miss despite the benefit of higher than estimated other income, analysts said. Revenues at the country’s biggest software services exporter stood at Rs 38,977 crore, up 2.1% compared to the June quarter, and below street’s forecast of Rs 39,427 crore. The constant currency (CC) growth in revenues was 1.6% on a q-o-q basis, which is the lowest sequential growth in the past two years. TCS did not report q-o-q growth in CC terms in its release.
Operating margins, stood at 24%, a decline of 20 basis points sequentially, lowest since June 2017 levels. On a year-on-year basis, operating margin declined 250 basis points. This reflects the impact of revenue pressure along with increase in hiring offshore as the industry continues to see increased offshoring, said analysts. The company reported an operating profit or EBIT (earnings before interest and tax) of Rs 9,361 crore, an increase of 1.5% on a sequential basis.
Speaking at the earnings conference, Rajesh Gopinathan, CEO and MD, TCS, said the company had a moderate quarter as the slowdown in BFSI vertical continues and retail remained volatile. “It is definitely lower than what we had originally anticipated but given the overall circumstances, we are quite happy with where we are,” he said.
Gopinathan said that there has been a strong deal flow and participation across segments, and the deal closures give the company confidence that its participation in the emerging opportunities sets its up nicely for the medium to long-term perspective.
However, he said that while the deal pipeline in terms of size and duration means double digit growth for TCS in the long-term, chances of it accelerating in the remaining two quarters of the current financial year are low. “We need to do better in second half compared to first to get to double digit, so we have to see how it pans out. Today we have no visibility”. The company had said that the second quarter will define the trajectory towards double-digit growth in the previous quarter.
Digital revenue forms 33.2% of the total and has grown 27.9% on a year-on-year basis, which is much slower than the 42.1% y-o-y growth during the June quarter.
In terms of headwinds, Gopinathan said that the company does not see any new headwinds. “Situation has remained similar to what it was earlier,” he said.
V Ramakrishnan, chief financial officer, TCS, said there have been two elements to the margins, one is that growth was expected to be higher both in retail from where it was 3-4 quarters back and BFSI was expected to improve, which has not happened. At the same time, overall capacity and investments in people and deals has remained strong. However, from the currency perspective, Ramakrishnan said that there has been a perception that there has been currency depeciation this quarter. “However, within the quarter rupee versus dollar witnessed 0.7% depreciation. Whereas the other currencies —pound sterling appreciated and euro has remained flat, while other currencies have also seen a rupee appreciation. As TCS has significant growth in the UK and Europe, which have seen rupee appreciation, impact of currency has not been there,” he said.
Meanwhile, after crossing into double digits in the March quarter, BFSI’s revenue growth slowed down further to 8% against 9.2% in Q1FY20. Retail & CPG growth came in at over 4.8% versus at 7.9% plus in the previous quarter. On BFSI, Gopinathan said that while insurance and regional banks in Europe and small banks in North America are doing well, large banks in the US and UK are under pressure and the softness is across the board. As for retail, TCS expects some of the deals to eventually go through as they are not cancelled yet, but the delay in deal completions have been longer than anticipated.
Company said revenue growth was led by life sciences & healthcare at 16% plus and communications & media at over 11.8%. Other verticals like manufacturing witnessed over 7.8% growth and technology & services came in at over 5.6%.
In terms of geographies, growth was led by Europe at over 16% and UK at 13.3% plus. North America and Asia Pacific grew 5.3% and 6.5%, respectively. Emerging markets showed steady growth — India at over 7.7%, MEA at 7.3% plus and Latin America at over 7.3%.
Hiring continued to be strong in Q2 with net addition at 14,097, the highest ever number of employees to be on-boarded in a quarter. At the end of Q2, over 3,22,000 employees had been trained on multiple new technologies, and over 3,91,000 had been trained on Agile methods. The company’s IT services attrition rate (LTM) stood at 11.6% during the quarter.