For the first time since 2019, TCS sees a fall in Sep quarter margins | Mint

Tata Consultancy Services Ltd (TCS) on Thursday kicked off the quarterly earnings season for India’s technology services companies, recording a sequential decline in profit as equipment costs doubled and revenue from the Americas fell.

India’s largest software services company reported a net profit of $1.43 billion for the September quarter, down 1.59% from the preceding quarter. This is the first time in five years that the company has ended the September quarter with a sequential decline, though its net profit has been slipping since the March quarter of this year.

However, revenue rose 2.2% sequentially and 6.38% on a yearly basis, touching $7.67 billion, in contrast to the previous year when it saw a decline.

“What we are seeing is that the revenue mix is largely led by Bharat Sanchar Nigam Ltd (BSNL). The company’s cost of equipment is up, which is why there is also an impact on margins and net profit,” said Manik Taneja, executive director for IT services at Axis Capital.

A TCS filing showed that its equipment costs doubled from the June quarter to $386 million, though the company did not specifically attribute it to the BSNL deal. TCS is in the process of setting up data centres across the country for the state-run telecom operator, as part of a $1.83-billion 4G network deployment order it won in May 2023.

Also read | TCS boss Krithivasan is unafraid of GenAI but unwilling to say the worst is past

With this, the Mumbai-based software services company has added $739 million in incremental revenues in the first half of the fiscal year, up 5.12% from the same period last year.

At the heart of TCS’s second quarter growth was its communication, media and technology business segment, which earned more than 90% of its incremental revenue of $165 million. TCS got $1.44 billion revenue from companies in this segment.

However, the growth has come at a cost as operating margins fell for the first time since September 2019. TCS’s profitability narrowed to 24.1%, down 60 basis points sequentially and 20 basis points from the year-ago period. One basis point is one-hundredth of a percentage point.

However, one bright spot in the TCS report card was its India business, which contributes almost 9% or $681 million to its revenue. Domestic clients contributed 74% to its $165 million incremental revenue in the quarter.

India’s $254 billion information technology (IT) services industry is grappling with an uncertain macroeconomic environment. A possible escalation of conflict in West Asia has also cast a shadow on the demand recovery, which eluded India’s top IT service providers last year.

“All the growth markets continue to grow above company average. However, as a general trend in the major market, the demand outlook continues to remain cautious, as seen in the last few quarters,” K. Krithivasan, managing director and chief executive officer of TCS, said in a post-earnings conference call.

“Globally, clients continue to prioritize efficiency through cost transformation programs and demand for discretionary deals, with no immediate ROI (return on investment) remain relatively subdued,” said Krithivasan.

Business from the Americas, which brings about half of its business, slipped as the region fetched $67 million less than in the June quarter. TCS got $3.79 billion in revenue from the Americas, which include clients in North and South America.

While the company exceeded analysts’ expectations in terms of growth, it trailed expectations on net profit. A Bloomberg survey of 26 analysts had expected TCS to report a revenue of $7.64 billion, whereas 24 analysts expected it to report a net profit of $1.48 billion.

About two years after the launch of ChatGPT sprang generative artificial intelligence (Gen AI) into boardroom discussions, TCS is yet to spell out revenue from it. This is in contrast to Accenture Plc, which secured $3 billion in Gen AI orders last year.

Also read | TCS, Infosys trail Accenture, global rivals in race for AI-project bookings

Revenue growth was accompanied by an increase in headcount. TCS added 5,726 employees last quarter, taking its overall employee count at the end of the first half of the fiscal year to 612,724.

The TCS management sounded sanguine about the future, as growth and headcount suggest a recovery is on the cards.

“With the easing of interest rate environment, consumer confidence and industry concerns will get better. This can potentially lead to improved investment. Customers are focused on operational efficiency, and upgrades for the future with an eye on efficiency and automation,” Krithivasan said.

In the first time since TCS went public nearly two decades ago, the company cancelled its press conference to discuss earnings performance, after chairman-emeritus Ratan Tata died late on Wednesday night.

TCS, which commands a market capitalization of ₹15.3 trillion, is India’s second most valuable company, and Tata’s stewardship of the group is significantly credited with its bluechip status.

“He (Ratan Tata) was convinced that retail investors in an initial public offering (IPO) taking place in a very frothy market would feel short-changed when the markets turned. A Tata company, he felt, ought not to take unfair advantage of a short-term bubble to mislead investors about its real value,” said Mukund Govind Rajan, who served as Ratan Tata’s executive assistant and then principal staff officer from 1996 to 2008, wrote in a Mint article.

“After witnessing this remarkable lesson in good corporate governance, I was fortunate to see, after the dotcom boom and inevitable bust, TCS in 2004 becoming the most successful IPO in Tata Group’s history,” said Rajan.