Analysts warn of lean quarters ahead, even as TCS profits soar


Oct 11, 2022

New Delhi: IT services giant Tata Consultancy Services (TCS) reported an 8.4% increase in net profit for the quarter ended September (Q2FY23) to ₹10,431 crore from ₹9,624 crore in the corresponding quarter of the previous year (Q2FY22) . However, analysts warned that the company’s growth was based on order completions over the past two years and that sequential declines could be expected in the coming quarters.

The IT services major posted constant currency growth of 15.4% year-over-year with an order book of $8.1 billion. TCS revenue saw an increase of 18% to Rs 55,309 crore from Rs 46,867 crore year-on-year. The IT services major also announced a second interim dividend of Rs 8 per share. It has October 18 as the recording date.

Shares of TCS ended with slight gains of 1.84% to ₹3,121 apiece on Monday ahead of the quarterly financial results.

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Operationally, TCS’ second quarter earnings before interest and tax (Ebit) rose 10.8% to ₹13,279 crore from ₹12,000 crore year-on-year. Ebit margin was 24%, up 20 basis points (bps) from 23.8% in the same quarter last year. A basis point is one hundredth of a percentage point.

Earnings before interest, taxes, depreciation and amortization (Ebitda) increased by 10.7% to ₹14,516 crore from ₹13,116 crore year-on-year.

“The demand for our services continues to be very strong. We achieved strong and profitable growth in all of our verticals and in all of our major markets. Our backlog is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing commitments. As customers prepare for a more challenging environment, technologies such as the cloud must now be fully leveraged to realize the value promised,” said Rajesh Gopinathan, Managing Director and CEO of TCS in the quarterly statement.

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According to the statement, on a segmental basis, TCS recorded broad-based growth across all verticals, led by retail, which recorded 22.9% year-on-year growth in constant currencies and CMI, in increase of 18.7% in constant currency terms.

Among Western markets, TCS recorded growth of 17.6% in North America, 14.1% in Continental Europe and 14.8% in the UK. The IT major was up 16.7% in the Indian market, while LatAm grew 19%, MENA (Middle East and North Africa) 8.2% and Asia-Pacific 7%.

“We are progressing towards our operating margin priority for the year, helped by good growth, a flattening workforce pyramid, improving productivity and currency support. Headwinds from the challenges of the supply side are easing, which sets us up well for the seasonally weak second half,” said Samir Seksaria, CFO of TCS.

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TCS added 9,840 employees, bringing the company’s total workforce to 6.16 lakh employees.

“Reflecting our culture of commitment to our employees, we honored every job offer we made. Our investments in capacity building and organic talent development enabled us to grow our business ahead of the headcount increase this quarter,” said Milind Lakkad, Chief Human Resources Officer at TCS.

Commenting on the 21.5% attrition rate in IT services this quarter, Lakkad added, “We believe our annualized quarterly attrition peaked in the second quarter and is expected to decline from there, while expectations in remuneration of experienced professionals will moderate.”

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However, while the IT major beat market estimates to post strong numbers for the quarter, analysts signaled a sign of caution for quarters ahead. Akshara Bassi, research analyst, global cloud and server market at market research firm Counterpoint Research, said most of the numbers reported for the quarter by TCS “come from the order fulfillment they have received in international markets over the past two years.”

“It reflects their performance and demand for digital transformation among organizations around the world during the pandemic period, which is likely what drove the net profit numbers,” she said.

Mitul Shah, head of research at Reliance Securities, agreed that IT services “will not remain immune to a worsening in global macros in terms of rising currency headwinds and likely spending cuts.”

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This reduction in spending in key TCS markets going forward will likely lead to sequential declines over the next two quarters. Counterpoint’s Bassi said the U.S. Fed’s rate hike, coupled with inflationary headwinds in the North American market “could lead to a sequential decline in overall revenue and earnings in the December and March quarters.”

Kashyap Kompella, managing director of industry research firm RPA2AI Research, added: “The clouds of recession are expected to intensify over the coming quarters in key customer markets, and overall demand for technology services may be affected”.

Shah of Reliance Securities predicted that TCS revenue growth “would narrow to low double digits in FY24”, while there could also be “a sequential decline in order backlog, a sharp drop in employee additions, higher attrition and lower pricing power”.

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However, it is certain that IT service companies will also experience an increase in demand due to the advent of 5G services in India and across the world. Counterpoint’s Bassi said 5G services “will create a strong market for IT service providers – even in our home market. This may see IT businesses, including small businesses, maintain some momentum in the future.

Kompella added that TCS may also be able to “manage” talent attraction and retention well, even if the hiring market cools.

With contributions from Shouvik Das and Devina Sengupta.