Q4 Results: TCS Profit Beats Estimates But Margin Contracts

Tata Consultancy Services Ltd. continued to see steady growth in business even as profit remained flat and margin narrowed in the March quarter.

Net profit rose 0.3 percent sequentially to Rs 8,126 crore in the January-March quarter, according to its exchange filing. That compares with the Rs 7,981-crore consensus estimate of analysts tracked by Bloomberg.

• Revenue rose 1.8 percent to Rs 38,010 crore quarter-on-quarter.
• Revenue in dollar terms grew 2.8 percent to $5,397 million.
• Operating profit fell 0.2 percent to Rs 9,537 crore.
• Margin contracted 40 basis points to 25.1 percent.

“This is the strongest revenue growth that we have had in the last fifteen quarters,” said Rajesh Gopinathan, chief executive officer, in a media statement. “Our order book is bigger than in the prior three quarters, and the deal pipeline is also robust. Despite macro uncertainties ahead, our strong exit positions us very well for the new fiscal.”

TCS’ performance over the last two quarters has been anchored by strong deal momentum, suggesting a return in client confidence. While growth has returned to the software services provider’s legacy verticals such as banking and financial services and retail, its digital business continues to drive growth. That’s despite uncertainties such as slowing global growth and the impending Brexit.

Even as the IT industry has started to move past the hurdles bogging them down for the past two years, a new challenge has emerged: rise in costs due to localisation.

Indian IT firms face stiff competition at offshore sites from captive centres—that are operated and owned by clients themselves—as they cost less. That adds to their sub-account expenses and eventually weighs on the margin.

“Even as IT companies have stepped up local hiring, the fact is that talent is not easily available at the mid-level. This will lead to increase in cost structure in the U.S.,” Kotak Institutional Equities said in a prior report. “The increase in cost structure was already visible in December 2018 quarter where subcontracting costs increased for Infosys Ltd. and TCS,” according to the report. “Some amount of rupee depreciation is necessary to offset the cost increase.”

The board has proposed a final dividend of Rs 18 per share.

TCS’ stock has gained 5 percent during the January-March period. That compares with a more than 8 percent rise in the NSE Nifty IT Index during the period. The stock closed 0.26 percent lower today ahead of the results announcement.