With "lower-than-expected Q2", TCS foresees more cloudy days

The largest software exporter TCS on Thursday reported a tepid growth in net income for the September quarter at Rs 8,042 crore, and guided towards more challenges putting a big question mark over its ability to deliver the double-digit growth trajectory. The gap between operating profit margins achieved and the aspirational number in the region of 28 percent widened, with the quarterly number printing in at a low 24 percent.

In what can be seen as an effort to calm the investors, the Tata Group company declared a second interim dividend of Rs 5 along with a special dividend of Rs 40. TCS was the first large firm to open the second quarter earnings season and it would be interesting to see what others report in the coming days, especially its immediate rival Infosys on Friday.

Significantly, hours ahead of the TCS numbers,domestic ratings agency Crisil said it expects India Inc's revenue growth to fall to a 14-quarter low during this earning season. It can be noted that citing rising uncertainties in the business environment, the software industry lobby Nasscom had in February stopped giving its yearly revenue growth estimates for the sector.

The Tata Group cash-cow delivered a tepid 5.8 percent spike in revenue growth at Rs 38,977 crore for the quarter, blaming the sluggishness in its mainstay of banking and also the retail sector for its woes. "It is definitely lower than what we had thought at the start of the year," managing director and chief executive Rajesh Gopinathan told reporters departing from the company's typically cautious stance on commentary.

"We expected it to be a defining quarter, but it has come in wherever it is and we would require H2 to be better than H1 to get into double-digits. But we will have to wait and see how it unfolds," he said. As a silver-lining, he said, he isn't worried much about the demand environment as a whole as the deal pipeline is still strong, and hinted at "right-sizing" the cost base to improve on the margins.

However, Gopinathan sounded circumspect about achieving the double-digit revenue growth mark for FY20. "Seasonally H2 is weaker. If you have to get to double-digits, we will have to deliver a H2 which is better than H1 and as of now it looks challenging, but we are focused on making sure that we participate in all the opportunities that are there and put our best foot forward," he said.

Revenue growth from the mainstay of the BFSI sector continued to slow down to 8 percent as large banks and the storied names from Wall Street showed weariness in spends, he said, adding, however, the smaller banks are doing well. Gopinathan singled out the retail sector, where revenue grew by only a tepid 4 percent, as an area which dented the performance the most.

"Incrementally, weakness in revenue is primarily coming from retail. We were expecting much better numbers from retail from the US and England," he said. He said TCS signed deals worth over USD 6.4 billion in revenue potential during the quarter and is also participating in many negotiations. However, he rued that not many of the deals are fructifying.

"There is an increase in deal size and deal duration which is good from the structural side. But it will take time for the order book to convert. I won't expect any acceleration in Q3 and Q4," he said, conceding that it had expected Q2 to be a "defining" quarter. Geographically, Europe and England delivered handsome revenue growth but same was not the case with US, he said, adding there was weakness in other geographies like India, the Middle East and Asia-Pacific as well.

Share of new age digital revenues grew to 33.2 percent of the revenue base on the back of a 28 percent growth. From a margin perspective, the operating margin printed in at a nine-quarter low of 24 percent, much below the aspirational target of 26-28 percent.

When asked about target band, chief financial officer V Ramakrishnan chose not to directly answer the aspirational band saying there is scope for more improvement on this front as there are no structural headwinds. It got impacted the most both because of lower revenue flows and also higher amount of overheads like higher wage outflows due to hiring of 14,000 during the quarter, he said, adding in the future talent investment will only be on a project-specific basis and not proactive.

Ramakrishnan also said the company will not benefit from the corporate tax cut as it already enjoys a slew tax incentives by the sheer nature of its business. Currency also played a truant, he said, adding the perception of help coming in because of the rupee depreciation is also a misnomer as the domestic currency has lost ground only against the dollar, while it has appreciated or stayed stable in case of others like the British pound and the euro during the quarter.

Its overall employee base stands at over 4.50 lakh and the head of human resources Milind Lakkad said it will hire 30,000 from campuses in the next fiscal as well. Gopinathan said after many quarters, the company was able to ensure that the sub-contracting costs are stable.

The results "confirm the risks to TCS' earlier outlook of double-digits growth and we would reckon that the street will align FY20 revenue growth to under 9 percent on constant currency basis," analysts at the city-based brokerage Emkay Global said. Ahead of the earnings announcement in the evening, the TCS counter shed 0.80 percent at Rs 2,004.40 on the BSE, as against a 0.78 percent correction on the benchmark..

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)