Tata Consultancy Services Ltd (TCS) reported a 5.2% increase in net profit from a year earlier, falling short of analysts’ expectations as growing staff expenses drained profits despite strong demand.
The Mumbai-based company’s net profit increased from 9,008 crore a year earlier to 9,478 crore in the quarter that ended on June 30. That fell short of the Bloomberg survey’s median profit projection of $9,907 crore.
Due to broad-based growth, revenue for the June quarter increased by 16.2% from a year earlier to 52,758 crore, matching the average Bloomberg forecast of 52,491 crore.
“With overall growth and significant transaction wins across all of our categories, we are off to a solid start in the new fiscal year. Pipeline velocity and transaction closings are still going well, but given the macro-level uncertainty, we are nonetheless on guard. Our new organizational structure has settled in well, bringing us nearer to our customers and enhancing our flexibility in a fast-paced setting. According to TCS CEO and Managing Director Rajesh Gopinathan, “Looking forward, we remain optimistic in the robustness of technology investment and the secular tailwinds driving our growth.
As consumer interest in digital and cloud computing services rose during the epidemic, Indian IT businesses reported strong profitability. However, the peak in their revenue growth is probably behind them, and the pace is anticipated to slow down starting in H2 FY23 as a result of customers delaying their technology spending and the lack of significant contract wins. The pressure on margins is brought on by pay increases, rising backfilling charges, and rising travel, visa, and other discretionary costs.
“Gartner forecasts that the total cost of IT services would increase by 6.2% YoY in 2022. The 16.2% YoY revenue growth for TCS is remarkable. Despite the macroeconomic uncertainty, Naveen Mishra, senior director analyst at Gartner, predicts that overall IT demand would stay strong during the second half of 2022.
According to Samir Seksaria, the chief financial officer of TCS, “annual salary increases, the elevated cost of managing the talent churn, and gradually normalizing travel expenses” are to blame for the company’s operating margin’s decline to 23.1% from 25.5% in the same time last year. According to him, TCS would employ levers like increased growth, improved utilization, and other operational savings to return to the ideal level of profits.
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On the strength of an order book with a total contract value (TCV) of $8.2 billion, the dollar revenue for the June quarter increased 15.5% in constant currency from a year earlier to $6.8 billion.
Regarding verticals, manufacturing (16.4%), technology & services (16.4%), communications & media (19.6%), and retail and consumer packaged goods (25.1%) also saw an increase. The largest verticals for TCS, banking, financial services, and insurance (BFSI), increased by 13.9%, while healthcare and the life sciences rose by 11.9%.
Analysts predict that TCS would be among the biggest gainers from the medium-term increase in technology investment. On the strength of vendor consolidation and captive monetization initiatives, we anticipate TCS to increase its market share. Moderating EBIT margins and a smaller order book, however, would slow future earnings growth and might result in a reduction in valuation multiple, according to Mitul Shah, Head of Research at Reliance Securities.
The attrition rate jumped to 19.7% in the June quarter from 8.6% in the prior quarter on a trailing 12-month basis, showing a rising demand for IT expertise in the sector, particularly in digital skills. However, on a quarterly basis, attrition decreased from 17.4% in the March quarter, showing that the efforts to reduce attrition are having an impact. During the quarter, the firm added a net of 14,136 workers, bringing the total workforce to 606,331.
After Friday’s market close, TCS announced its profits. The shares on the BSE decreased 0.67% to 3,264.85 before the findings.
