Third quarter numbers: TCS profit growth meets estimates

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Mumbai | January 12, 2018 5:43 AM

Digital business sees strong growth; Europe on track to become second largest market after the US.

tcs, tata consultancy service, it sector, india, economy, Managing director and CEO Rajesh Gopinathan The company maintained its operating margins, with a 10-basis-point increase sequentially to 25.2%, even after currency adjustments. (Reuters)

Tata Consultancy Services (TCS) on Thursday reported a net profit of Rs 6,531 crore for the three months ended December 2017, marking a quarter-on quarter increase of 1.3%. The performance, supported by volume expansion (especially in the digital business) and improved profitability, was in line with analysts’ estimates.

Analysts had estimated TCS would report a net profit of Rs 6,532 crore on revenues of Rs 31,054 crore, Bloomberg data showed.

For the December quarter, considered seasonally weak for the IT industry, revenues of the country’s biggest software services exporter came in at Rs 30,904 crore, an increase of 1.2% over the September quarter, and a tad below street estimates. However, the company said it registered its strongest sequential volumes growth in the December quarter in three years of 1.6%, while revenues in dollar terms were up 1% to $4.79 billion.

The company maintained its operating margins, with a 10-basis-point increase sequentially to 25.2%, even after currency adjustments. The company reported an operating profit or Ebit (earnings before interest and tax) of Rs 7,781 crore, up 1.6% sequentially.

Managing director and CEO Rajesh Gopinathan noted that the company maintained its margins and the cash conversions have been most impressive, while volumes growth was robust, driven by demand across multiple industry verticals. “We have seen client additions and have announced 11 large deals,” Gopinathan observed.

He said that digital was coming of age and TCS was emerging as a preferred transformational partner for organisations that are looking to take advantage of new opportunities and ramping up their digital investments. “We signed our first $50-million-plus deal in digital this quarter, crossing an important milestone in the mainstreaming of digital technologies. The investments we have been making over the last few years in research and innovation, and in building intellectual property, are giving us a distinct edge in the market in winning such large transformational programmes,” he said.

Gopinathan said the growth in digital is being aided by focus on talent development, skill building and capacity building. “Our digital revenue as a percentage of our revenues has crossed 22% and now we are at a run rate of $4 billion annually in digital revenues, which represents a year-on-year growth of slightly more than 39%,” he noted.

Gopinathan said retail has started a rebound and the company has delivered a fair growth, while other smaller industries like energy, utilities, travel and hospitality continue to grow well. “This holiday season saw traditional retailers leverage technology to deliver performance,” he added.

However, any significant recovery in the banking and financial services segment, which accounts for about 39% of revenues, seems a little way off. “Banking continues to be an area where we are on a wait-and-watch mode, we are still a few quarters away from recovery. It is patchy, for example growth in Europe is driven by banking and there are some strong deal wins from BFSI segment also.”

Speaking of Europe specifically, Gopinathan said the continent continues to lead TCS’ growth. “We have had sequential growth of 2.6% in Europe, and it is on a very strong trajectory and if it continues, we expect Europe to become our second largest market after US sometime during the course of next year… The growth is happening across the verticals, we continue to be optimistic as the breadth of penetration is increasing there,” he said. Also, the US delivered growth that is marginally better than the company average, he said.

Ajoyendra Mukherjee, executive VP and global head, human resources, said, “Overall attrition has come down and we are doing well in retention of employees. We have utilised the capacity we built in the last few years and we are recruiting accordingly.” Total employee strength at the end of Q3FY18 was 390,880 on a consolidated basis with gross addition of 12,534 and net addition of 1,667 employees during the quarter. The total attrition rate fell to 11.9% including BPS, with IT attrition at 11.1%, down 20 basis points.

Operating cash to revenue ratio is at 25.1. Gopinathan said, “We have delivered more than Rs 7,700 crore of operating cash flow and over Rs 7,300 crore of free cash flow, our cash-in-hand at the end of this period is about Rs 40,500 crore. In the last nine months we have distributed Rs 25,300 crore as cash returns to shareholders through a combination of buybacks and dividends.”

V Ramakrishnan, chief financial officer, said: “Concerted efforts by all our teams and tighter working capital management resulted in very strong cash conversion this quarter. Several of the key deals we signed this quarter are a vindication of our strategic patience.”

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