TCS Q1 profit falls 3%: Chinks in the armour but digital to be the saving grace

Tata Consultancy Services (TCS), the country’s largest software exporter, on Thursday reported a 3.33 percent on quarter fall in its profit after tax rose for April-June this year, but exuded confidence that the company will be able to tap the revenue potential from the new digital space. At Rs 5,709 crore, the company said the net profit has grown 48 percent sequentially, but it is actually a fall of 3.33 percent if the the Rs 2,628 crore one-time bonus pay off last quarter is taken into account. [caption id=“attachment_2336318” align=“alignleft” width=“380”] Reuters image[/caption] The revenue, meanwhile, rose 6 percent to Rs 25,668.11 crore. The profit was up 2.1 percent on year and revenue 16 percent. The net profit was higher than analysts’ expectations of Rs 5,466 crore in a CNBC-TV18 poll. Rupee revenue increased 6.1 percent on quarter to Rs 25,700 crore and dollar revenue 3.5 percent to $4,036 million during the quarter. Analysts have termed the earnings a disappointment, despite the profit numbers beating their estimates. Reacting to the results, shares of TCS on the BSE opened higher but quickly declined more than 1 percent. Here is an explainer on the results: 1. Attrition a big worry: Despite the Rs 2,628 crore bonus paid out last year, employees are leaving the company. The attrition rate has been rising for TCS. Right from third quarter of 2013-14, the rate has been on the increase for the seven consecutive quarters. It has increased from 10.9 percent in Oct-Dec 2013-14 to 15.9 percent in April-June 2015-16. 2. One more miss on revenue: Another worry for the analysts. In April-June, the company’s top line stood at Rs 25,668 crore, up 6 percent sequentially. According to CEO N Chandrasekaran, the moderation has been due to a fall of 130 basis points in sales realisations in Japan and Latin America. The poor show by its Diligenta unit is another reason. Most brokerages have termed this a miss but there is hope ahead. Ambit expects the deceleration in revenue growth trajectory to diminish in 1-2 years. Credit Suisse also feels though revenue has been lighter than expectations, there are no visible worries in the underlying trend, CNBC-TV18 reported. Given the moderation in revenue growth, Emkay has cut its target P/E multiple to 19x P/E (from 20x) and target price to Rs 2,620. 3. May not beat industry average growth: Nasscom’s revenue growth estimate for the IT industry this year stands at 12-14 percent. With the slow growth the company recorded in the first quarter this year, it is unlikely to outdo this, says a report in The Economic Times. If the company wants to achieve this, it will have to grow 5 percent each quarter now. This is unachievable as October-March are traditionally lean quarters for the software sector, when TCS has grown just about 4 percent sequentially for the last three years, the report notes. 4. Digital the silver lining: The company has said the digital space accounts for 12.5 percent of the overall revenue of the company and is the fastest growing segment for it. It sees the revenue from this stream crossing $5 billion over the next five years. This segment includes social media, mobile, analytics and cloud. Brokerages also have given thumbs up to the company’s enthusiasm in the segment. “While there are some chinks appearing in TCS’s armour after the well rounded performance through several years, we believe that they are largely on account of the transitioning demand environment for the offshore IT Services space as they brace up for the ‘increasingly Digital’ demand,” says Emkay in a post-earnings reasearch note. Kotak Institutional Equities too thinks TCS is well-placed for a bounce-back despite the revenue misses for the last few quarters. “TCS has made the right calls in expanding the addressable market opportunity and invested in platforms and digital ahead of competition. This backed with strong executions places the company well for growth,” it said. Data support from Kishor Kadam