TCS reports flat net profit growth in Q3

The earnings of Tata Consultancy Services (TCS) for the quarter ended December last year met industry estimates but failed to impress analysts, unlike the earnings of its peer, Infosys.

TCS’ net profit and revenue narrowly missed the Bloomberg consensus estimates of Rs 5,493 crore and Rs 24,534 crore, respectively. The company paid 100 per cent variable pay, which might have hit its profit for the quarter.

TCS reported a net profit of Rs 5,444 crore (according to International Financial Reporting Standards), an increase of 5.1 per cent compared to the year-ago period. At Rs 24,501 crore, the revenue increased 15.1 per cent year-on-year. On a sequential basis, the net profit and revenue increased 2.9 per cent each.

In dollar terms, the revenue was flat at $3,931 million, while on a constant currency basis, it rose 2.5 per cent sequentially.

What disappointed analysts was volume growth of just 40 basis points. The company attributed this to furloughs in some sectors and a slow quarter, owing to a high number of holidays. However, considering the company’s performance in past third quarters, too, TCS seems to have fared poorly. For the corresponding quarter of FY14, volume growth was 1.8 per cent.

The growth also seemed pale compared to Infosys’s 4.2 per cent growth. “Both revenue and margins were in line with our estimates. Growth was led by significant pricing realisation — volume grew 0.4 per cent. While it is tempting to compare this with Infosys’s over four per cent quarter-on-quarter volume growth (realisation was down), we think revenue growth is the key metric to focus on; the distinction between volume and price can be blurry, especially in the case of fixed-price contracts,” Anantha Narayan and Nitin Jain, research analysts at Credit Suisse, said in a report.

TCS’ revenue was hit by unfavorable cross-currency movements and relative softness in the insurance and retail segments. Shashi Bhusan of Prabhudas Lilladher agreed the earnings were softer than expected but added the management commentary was strong and positive.

“We have reported a good set of numbers on a seasonally weak quarter. The growth this quarter was led by pricing. The deal pipeline looks strong. The initial reaction from clients is they are ready to spend. We are confident of having industry-leading growth rates,” said N Chandrasekaran, chief executive and managing director.

He added the banking and financial services (BFS) segment would see an uptick in discretionary spending and grow across the US and Europe. “Going ahead, the volumes will also grow,” he said.

During the December quarter, TCS signed seven large deals — four in the BFS segment and one each in the insurance life sciences and retail sectors. The company added one $100-million client and three $50-million ones in the quarter.

Among large markets, continental Europe grew the fastest in constant currency terms, driven by investments in that market. Operations in the UK were weak (down one per cent quarter-on-quarter in constant currency terms), primarily due to its subsidiary Diligenta.

“Based on our progress this quarter, we are well on our way to posting industry-leading growth for FY15. In areas such as digital, simplification and governance, we continue to closely partner customers to help them prepare their businesses to succeed in an economy in which the default is digital,” Chandrasekaran said.

The company continued to hire aggressively, with a gross addition of 16,561 people (net addition of 4,868) during the quarter; its overall employee strength stood at 318,625. However, employee attrition increased about 60 basis points.

The TCS management reiterated the company wasn’t laying off employees, as stated on several social media platforms. “I can identify with several of our employees. I have worked my way in the company. We invest a lot in training and as a policy, HR (human resources) looks at multiple years of an employee’s performance. We want to give as many opportunities to each; this year is no different,” said Chandrasekaran.

The company stated it might hire more during FY15. “We have already hired 52,700 employees so far. We had stated we would hire 55,000 this year. It looks like we are likely to exceed our target,” said Ajoy Mukherjee, executive vice-president and global head (HR).