TCS Q1 PAT dips 4.5% on-quarter, but beats street estimates

Tata Consultancy Services (TCS), the largest software exporter in the country, on Thursday reported first quarter earnings that beat street estimates, with the company registering a 4.5% sequential decline in April-June net profit at Rs 5,058 crore. The Bloomberg estimate of 24 analysts had projected an 8.7% sequential decline in net profit at Rs 4,890 crore.

On a quarter-on-quarter basis, the software major reported 2.6% growth in revenues over the preceding quarter, in line with market expectations, mainly driven by robust volume growth and strong utilisation.
TCS reported a 45% year-on-year growth in net profit while its revenue rose 22.9% to Rs 22,111 crore, from a year ago.

Wage hike, currency headwinds and one-time charge due to change in depreciation policy mainly resulted in a decline in profit during the first quarter. TCS reported EBIT margin of 26.3%, which had a negative impact of 219 bps because of wage hike, 73 bps from currency headwinds and 79 bps due to one time charge following change in depreciation policy and a positive impact of 86 bps due to operational efficiency.

In April, Ajoy Mukherjee, global HRD head, TCS, had announced average wage hike of 10% for Indian employees and 14%-plus for high performers. The company had to record one-time charge of Rs 174.6 crore due to change in depreciation policy.

In dollar denominated terms, the Mumbai-based company's revenue grew 5.5%, (again beating street estimates) on quarter to $3,694 million, which it claims to be the highest in last 12 quarters. The company reported volume growth of 5.7% as against 2.6% in previous quarter and all time high utilisation of 85.3% (excluding trainees).

Last week, TCS' rival Infosys exceeded margin estimates, but disappointed with volume growth, which declined to 2.9% in the April-June quarter from 4.1% in the same quarter last year.

"Growth is very broad based, US has done exceptionally well with 5.7% growth and growth in UK, Europe, India has been more than 5%, while we have had muted growth in middle-east. All our industry verticles, except BFSI have grown more than or round about 5%. BFSI have been muted due to insurance," said CEO and MD, N Chandrasekaran while commenting on the Q1 performance. He further added that going ahead higher growth was expected in discretionary spends, mainly towards digital technology.

The company, which has been seeing softer growth from India, reiterated that it was still very cautious on the domestic market and expected pick-up in volumes towards the year end. During the quarter, TCS won seven large deals in verticals like retail, life science, healthcare, banking and insurance, spread across the markets.

The company has witnessed fairly stable pricing during the quarter. On being asked about the pricing trajectory, Rajesh Gopinathan, chief financial officer, said, "We are not seeing any specific trend in pricing in any direction up or down." He further added that currency could remain as a headwind going ahead but as long as there is no big volatility there should not be much problem.

The Tata Group company is on track to achieve its hiring target of 55,000 people, of which 25,000 would be through campus recruit. Around 3,000 freshers have already joined the company. Last quarter it had gross additions of 15,817 and net additions 4,967. The attrition rate was seasonally higher at 12.0% as compared to 11.3% in the fourth quarter.

On its Japanese joint venture with Mitsubishi, which was announced in April, Chandrasekaran said it would be operationally effective from July and the revenues would reflect from quarter two. "There is substantial change in currency, so have to quantify the impact. The incremental revenue will be lower than expected and is not a concern. The deal is as per plan, the team is in place. Our team is engaged with customers so all those things are happening. We have made the right deal so am pretty positive and will be spending time to shape up in this market," he added.