Five reasons why TCS reported lower-than-expected Q1 profit, margin
Premium- TCS Q1 net profit came at ₹9,478 crore, up 5% from the year-ago quarter, however, was down 4% sequentially
IT giant Tata Consultancy Services Ltd (TCS) on Friday missed analyst estimates for June-quarter net profit at ₹9,478 crore as compared to ₹9,904 crore average of analysts’ projections.
TCS' Q1 net profit rose 5% to ₹9,478 crore for the first quarter of the current fiscal, as compared to ₹9,008 crore from the same quarter last where. However, the profit was down 4.5% sequentially.
Operating margin for the quarter stood at 23.1%, down from 25.5% year ago, mainly due to impact of annual salary increase, elevated cost of managing the talent churn and gradually normalizing travel expenses. Whereas net margin during the quarter came at 18%. TCS' total expenses rose to ₹40,771 crore from ₹33,969 crore in the same quarter last year.
“It has been a challenging quarter from a cost management perspective. Our Q1 operating margin of 23.1% reflects the impact of our annual salary increase, the elevated cost of managing the talent churn and gradually normalizing travel expenses. However, our longer-term cost structures and relative competitiveness remain unchanged, and position us well to continue on our profitable growth trajectory," said Samir Seksaria, Chief Financial Officer.
The reasons for lower-than-expected profit and dip in margin can be attributed to higher expenses, salary hikes, cost of managing the talent churn, cutbacks in technology spending, and battling cost challenges despite strong deal momentum.
TCS' Chief HR Officer Milind Lakkad said the IT giant has increased their employees' salary by upto 8%. “Following our annual compensation review, employees received salary increases of 5 to 8%, with top performers getting even bigger hikes. Our empowering, performance-driven work culture is helping us attract local talent across all our key markets," he said.
Kicking off the earnings season, TCS is the first among its peers to report earnings, with investors looking to gauge the outlook for the sector. Analysts had expected TCS to report a sequential dip in Q1 margin due to wage hike and increase in other expenses.
IT companies have started seeing margin erosion due to higher employee-related costs and a moderation in deal wins due as macro-economic environment remains uncertain due to Russia-Ukraine war, higher inflation and higher interest rate environment.