As margins shrink, TCS net rises 1.8%

Banking and financial services, retail verticals prove a drag; may hit firm’s double-digit growth aim

India’s largest software exporter Tata Consultancy Services (TCS) reported a 1.8% increase in its net profit to ₹8,042 crore for the second quarter, a metric that may impact the company’s target of achieving a double-digit growth this fiscal.

The rise in profit was below street expectations as the July-September quarter had historically been the strongest one for Indian IT services companies.

The slower pace of rise in profit was due to a drag in the BFSI and retail verticals and margin contraction.

The company’s operating margin during the quarter fell by 20 basis points to 24%.

Commenting on the performance, Rajesh Gopinathan, chief executive officer and managing director, said, “We ended the quarter with steady growth despite increased volatility in the financial services and retail verticals. We remain confident as the medium and longer term demand for our services continues to be very strong, as evidenced by our Q2 order book — the highest in the last six quarters.”

The profit was reported on a 5.8% growth in revenue to ₹38,977 crore, with digital growing 27.9%, accounting for a third of the total revenue. Life sciences and healthcare grew 16% and communications and media at 11.8%. The rest of the verticals grew in single digits.

Among geographies, Europe and the U.K. contributed 16% and 13.3% of the growth while North America and Asia Pacific grew 5.3% and 6.5%, respectively. Emerging markets showed steady growth — India (over 7.7%), MEA (over 7.3%) and Latin America (over 7.3%).

Special dividend

TCS announced a total dividend of ₹45 per share, including ₹40 as special dividend. The firm had a net addition of 14,097 employees, the highest-ever onboarded in a quarter, taking the consolidated headcount to 4,50,738 as on September 30. “TCS’s September 2019 quarter operating performance was weak on both growth and margins. A 1.6% QoQ constant currency growth in Q2 is the lowest sequential growth in the past two years and confirms the weakness that the street has generally been worried about due to the macro backdrop,” said Emkay Global Financial Services in its research note, with a ‘hold’ rating on the stock.

“EBIT margins slipped to 24%, down 20 bps QoQ (versus expectations of sequential increase) which are the lowest since June 2017, and reflect the impact of revenue pressure along with the build-out of the offshore bench as the industry continues to see increased offshoring,” it added.

TCS’s shares rose 0.8% to ₹2,004.40 on Thursday on the BSE.

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Printable version | May 29, 2020 10:33:45 PM |

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