TCS posts 26.9%Y-on-Y profit growth in Q1

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N Chandra, CEO and managing director of Tata Consultancy Services

India’s largest software-services exporter TCS on Thursday recorded a 4.5 percent sequential decline in profit during the April-June quarter, while year-on-year it was up 26.9 percent. In dollar terms sequential revenue grew 5.5 percent to $3.69 billion, highest in 12 quarters, backed by surge in outsourcing demand among overseas clients.   

The Mumbai-headquartered IT firm posted net profit of Rs 5,058 crore during the first quarter ended June compared to Rs 5,297 crore in the January-March period. Its closest rival Infosys recorded a 3.5 percent sequential decline in net profit at Rs 2,886 crore during the June quarter; while year-on-year it was up 21.6 percent. In dollar terms TCS reported net profit of $845 million up 20.5 percent year-on-year.  

TCS’ net decline during the quarter as wage hikes, rupee appreciation against the US dollar and higher visa costs, which are typically incurred in April when visa applications are filed impacted the bottomline.     

"EBIT margin declined by 285 basis points q-o-q to 26.3 percent due to headwinds of wage hikes, rupee appreciation as well as charge due to change in depreciation policy. Adjusting for impact from change in depreciation policy, operating margins are inline with the expectations. Reported net profit came in at Rs 5058 crore," said Ankita Somani, IT analyst, MSFL Research.

TCS’ dollar revenue growth of 5.5 percent beats estimates as analysts tracking the sector projected the IT major to report sequential dollar revenue growth in the range of 4.5-5 percent.

April-June stretch is a seasonally strong quarter for the industry as client budget for IT spend starts rolling out during the first quarter of the fiscal. Maintaining the upbeat earnings momentum set by Infosys last week, TCS has started the current fiscal on a positive note. The IT major posted a robust volume growth at 5.7 percent during the June quarter, while operating margin was recorded at 26.3 percent.   

“Robust volumes and healthy growth across all industries and key markets helped TCS start the new financial year on a strong note as our broad-based business portfolio continues to deliver results. We have a strong demand pipeline in place and our customer-centric mindset, leadership in the ‘Digital’ space and strong execution capabilities will help us to sustain our momentum,” N Chandrasekaran, CEO and managing director, TCS, said in a statement while announcing the first-quarter earnings.

“On the occasion of the 10th anniversary of TCS’ IPO, the board of directors has announced a special dividend of Rs 40 per share,” he noted.

"TCS has outpaced its peers on revenue and EBITDA growth in the last three years, which we believe is sustainable. TCS, with its superior market coverage across geographies, industry verticals and a wide array of services that it provides, is best placed to capture demand.A healthy pipeline, initial signs of up-turn in discretionary spending and good traction in annuity, traditional and transformational business - all these factors have collectively lent confidence to the company in estimating FY15 to be a better year than FY14," said Somani of MSFL Research.  

During the April-June period, TCS posted the highest incremental revenue of $191 million in the last 15 quarters driven by growth across markets led by North America. Asia-Pacific, India, UK and Europe all continue to grow, the company said.

“Our disciplined stance in operations helped us mitigate the impact of multiple headwinds like currency movements, accelerated depreciation norms and wage hikes during the quarter. Looking ahead, we will continue to maintain our operating margins in our desired band by operating efficiently,” said Rajesh Gopinathan, CFO, TCS.

The IT major pointed out that growth during the June quarter was across all industry segments led by media and information services, life sciences, retail and telecom growing in excess of five percent sequentially. In the April-June stretch, TCS added five new clients in the over $50 million bracket.

During the quarter, TCS had a net addition of 4,967 people. The total employee strength at the end of the first quarter stood at 305,431 on a consolidated basis. The utilisation rate (excluding trainees) was at an all-time high of 85.3 percent, while including trainees it was 79.8 percent. The attrition rate on a last twelve month basis (LTM) was seasonally higher at 12 percent.

“Our focus on productivity continues to yield results with utilisation rates at an all-time high of over 85 percent. We have already started on-boarding the campus trainees this year with 2,500 joining in June,” Ajoy Mukherjee, executive vice president and global head, Human Resources, TCS said in a statement.

Among the mid-tier IT services company, Mindtree on Thursday posted 11.9 percent year-on-year decline in net profit at $21.7 million during the April-June quarter, while revenue rose 20.1 percent to $141.3 million during the period.       

The decline in net profit was due to large forex gain in the first quarter of FY14, the company said in a statement. The Bangalore-based company posted a 6.4 percent sequential rise in dollar revenue growth, while net profit grew 36.7 percent sequentially.

“We are seeing good traction with clients through multi-year, multi-million dollar deals. Apart from strong demand across the traditional service lines, we are now getting picked up as the lead partner for digital by customers.” said Krishnakumar Natarajan, CEO and managing director, Mindtree.

Shares of TCS closed at Rs 2381.10 down 0.84 percent, while Mindtree was up 0.47 percent closing Rs 880.75 on the Bombay Stock Exchange on Thursday. The sensitive index, Sensex, ended the day marginally up 0.04 percent.