Info-tech

TCS second quarter results set alarm bells ringing

Rajalakshmi Nirmal BL Research Bureau | Updated on January 16, 2018 Published on October 14, 2016

TCS’ CEO N Chandrasekaran (file photo)

Traditional revenue streams weigh on growth

TCS delivered weaker than expected numbers in the September quarter. Investors would have been in for a lot more disappointment had the company not warned them of large cut in spends by BFSI clients in its mid-quarter update in September.

Sequential revenue growth in constant currency terms in the September 2016 quarter was a meager 1 per cent (versus the expected 1.7-1.9 per cent). Volume growth was 1.3 per cent quarter-on-quarter, down from the previous quarter’s 3.4 per cent growth.

Revenue from North America grew by just 1.4 per cent sequentially in constant currency terms. Revenues from UK declined 0.1 per cent and that from India declined 7.6 per cent. The company’s largest vertical- BFSI (accounting for over 40 per cent of revenue) recorded a revenue growth of just 1.2 per cent sequentially in constant currency terms. The company indicated caution among clients who are holding back on discretionary spends. Revenue from the retail & CPG business declined by a sharp 3.1 per cent on delay in project ramp ups.

Some cheer

TCS’ CEO N Chandrasekaran tried to calm investor nerves in the conference call post the results by saying that the slowdown seen is only because of cyclical headwinds and the global technology spends are on the rise. He denied concerns of loss in market share in the BFSI space.

However, there were some bright spots in the quarter's performance. Attrition hit the lowest in many quarters down to 11.9 per cent versus 12.5 per cent in the June 2016 quarter and 17.3 per cent in the same quarter last year. Operating profit margins improved by 90 basis points sequentially to 26 per cent versus 25.1 per cent in the June 2016 quarter. Despite headwinds from cross-currency movement impacting margins by 0.4 per cent, the margin improvement came on the back of operational efficiencies.

Traditional market slack

What is very clear from TCS’ numbers is that traditional revenue streams that are on a decline, is weighing on growth. Digital revenues that grew by a healthier 30 per cent in the last quarter (year-on-year in constant currency terms) still make up just about 16 per cent of overall revenue.

Revenue from the application, development and maintenance service line which contributes to about 40 per cent of the company’s revenue grew by just 0.9 per cent (2.5 per cent year-on-year) in the September quarter. The service line recorded growth of 0.4 per cent in the June 2016 growth.

Consultancy revenues are also not growing much. In the September quarter, revenue from enterprise solutions and consulting services saw a 2 per cent growth sequentially (in constant currency terms)- up 8.6 per cent year-on-year.

Published on October 14, 2016
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