TCS Q1 net profit up 5.2%, revenue jumps 16.2% on broad-based growth

Tata Consultancy Services Ltd (TCS) reported a 5.2% rise in net profit from a year earlier, below analysts’ estimate, as rising employee costs squeezed earnings even as demand remained robust.

The Mumbai-headquartered company’s net profit rose to ₹9,478 crore in the quarter ended 30 June from ₹9,008 crore in the year earlier. That trailed the ₹9,907 crore consensus profit estimate in a Bloomberg survey.

Revenue for the June quarter grew 16.2% from a year ago to ₹52,758 crore on the back of broad-based growth, in line with consensus Bloomberg estimate of ₹52,491 crore.

“We are starting the new fiscal year on a strong note, with all-round growth and strong deal wins across all our segments. Pipeline velocity and deal closures continue to be strong, but we remain vigilant given the macro-level uncertainties. Our new organization structure has settled in nicely, getting us closer to our clients and making us nimbler in a dynamic environment. Looking ahead, we remain confident in the resilience of technology spending and the secular tailwinds driving our growth,” said Rajesh Gopinathan, chief executive officer and managing director of TCS.

Indian IT companies reported robust earnings during the pandemic as demand for digital and cloud computing services soared. But the peak revenue growth is likely to be behind them and the momentum is expected to start softening from H2 FY23 on account of absence of large deal wins and clients postponing their technology spends. Margins are under pressure due to wage hikes, higher backfilling costs, and increase in travel, visa, and other discretionary expenses.

“Gartner projects that overall IT services spend will grow at 6.2% YoY in calendar year 2022. TCS YoY revenue growth of 16.2% is impressive. Despite the macroeconomic uncertainties, Gartner believes that overall IT demand will remain robust for the second half of 2022,” said Naveen Mishra, senior director analyst, Gartner.  

TCS’s operating margin contracted to 23.1% from 25.5% in the year-ago period due to “annual salary increase, the elevated cost of managing the talent churn, and gradually normalizing travel expenses,” said Samir Seksaria, chief financial officer, TCS. He told reporters that TCS will use levers like better utilization, growth, and other operational efficiencies to get back to the optimum level of margins.

The dollar revenue for the June quarter grew 15.5% in constant currency from a year earlier to $6.8 billion on the back of an order book worth a total contract value (TCV) of $8.2 billion.

In terms of verticals, growth was led by retail and consumer packaged goods (25.1%) followed by communications & media (19.6%), manufacturing (16.4%), and technology & services (16.4%). The banking, financial services and insurance (BFSI) sector, the largest vertical for TCS grew 13.9% while life sciences and healthcare grew 11.9%.

Analysts believe TCS is likely to be one of the key beneficiaries of medium-term uptrend in technology spending. “We expect TCS to gain market share on the back of vendor consolidation and captive monetization efforts. However, moderation in EBIT margins and lower order book would reduce pace of earnings growth going ahead and may lead to downward revision to valuation multiple,” said Mitul Shah, Head of Research at Reliance Securities.

On a trailing 12-month basis, the attrition rate increased to 19.7% in the June quarter from 8.6% in the year-ago period indicating a growing demand for tech talent in the industry especially in digital skills. The attrition however came down on a quarterly basis from 17.4% in the March quarter which reveals that the measures to contain attrition are bearing fruit. The company made a net addition of 14,136 employees during the quarter taking the total headcount to 606,331.

TCS declared its earnings after the end of trading on Friday. Ahead of its results, the shares fell 0.67% to ₹3,264.85 on the BSE.