The techonology behemoth’s operating margin stood at 25.1 % in Sept quarter, up from about 23.4 % in the first quarter, helped partly by cross-currency gains and lower costs
Mumbai: Tata Consultancy Services (TCS), which reported second quarter results on Thursday, beat market expectations on account of higher margins, and said that client optimism in finance and retail sectors seems to be returning.
The market-beating results came as a surprise at a time when muted growth has become a familiar story for the sector, which is struggling with structural changes to the way it does business and is being battered by protectionist sentiments in its major markets.
“It has been a satisfying quarter considering the environment. The old team in new roles are very happy. We have been meeting clients across the globe and we are seeing a return of optimism. It is measured,” said CEO Rajesh Gopinathan, who took over from predecessor N Chandrasekaran in February.
Operating margin stood at 25.1% this quarter, up from about 23.4% in the first quarter, helped partly by cross-currency gains and lower costs. The company maintained operating margin of 26-28% guidance for fiscal 2018.
TCS reported a net profit of $1 billion on revenue of $4.74 billion for the quarter ended September. It reported a constant currency sequential revenue growth of 1.7% from the previous quarter. Analysts were expecting a profit of $963.88 million on a revenue of $4.67 billion, according to a Bloomberg poll.
“TCS’ results were ahead of our estimates with strong volume growth qoq (part negated by lower realisations) in the quarter. Revenues in constant currency terms was driven by sustained strong traction in the digital service offering,” said Emkay Global in a report.
In rupee terms, the company reported a profit of .₹ 6,446 crore on revenue of .₹ 3,0541crore. In client additions, the company added clients in $100 million+ category up by 1; $50 million+, $20 million+ & $10milion+ each up by 6.
“The positive aspect of the results has been stronger margins. But if you go into the nitty gritties these are the result of cross-currency benefit and operating efficiency. That is the not the best way to increase margins. They seem temporary,” said Girish Pai, an analyst at Nirmal Bang, who has a “sell” rating on the stock.
Revenue from the company’s largest line of business – Banking, Financial Services and Insurance (BFSI) segment – grew 1.9% on constant currency basis while revenue from the second largest segment, retail, fell 0.9 %. “We have to see how the new optimism will translate into spends. But the old fear of old economy businesses being wiped out is gone,” said Gopinathan. “In retail we are partnering with brick and mortar companies who are coming back to fight ecommerce companies. BFSI had gone through an era of being under threat from fintech companies. We are past that. Now they see fintech as part of the ecosystem.” Gopinathan added that TCS could see a turnaround in the struggling retail segment in a few quarters as it seems to have bottomed out but he declined to give a specific timeline on the turnaround in the BFS sector.
Analysts have pointed out that there have been increased discussions on ground and positive business sentiment across the US but any revival in spend is still elusive. Some of the structural concerns – regulatory risks in the US and rupee appreciation – have also receded.
Continental Europe was the most lucrative market for the company showing a 5.3% sequential growth on constant currency basis, whereas the North America market, which contributes more than 50% revenue grew only at 1.4%. UK grew 2.5%, Asia Pacific grew 3% and India fell 6.8%. The Mumbai-headquartered firm said digital revenue made up 19.7 % of revenue, up 5.9% in the previous quarter in constant currency terms.
Gopinathan said that TCS could see a turnaround in struggling retail sector in a few quarters as it seems to have bottomed out
Operating margin in Q2 Operating margin in Q1 Constant currency sequential revenue growth
Profit beats market expectations, margins recoup Maintains 2018 operating margin guidance of 26-28%
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