News Analysis

TCS: Strong digital growth, but strengthening rupee shrinks margin

Vivek Ananth BL Research Bureau | Updated on July 09, 2019 Published on July 09, 2019

In an uncertain global environment, where IT spends could be curtailed, Tata Consultancy Services Ltd (TCS) posted robust revenue growth in the first quarter (April-June) of FY20. In rupee terms, consolidated revenue came in at ₹38,172 crore, up 11.4 per cent compared to the same period last year. In constant currency terms, revenue grew by 10.6 per cent y-o-y to $5.49 billion. Consolidated net profit rose 10.8 per cent to ₹8,131 crore.

Digital revenue for the company continued growing at a smart pace — it is now 32.2 per cent of the total quarterly revenue and has now reached an annual run rate of $7 billion.

In constant currency terms, revenue from North America grew 7.7 per cent y-o-y during the quarter. There was some tempering of growth in Europe and UK, which grew at 15 per cent and 16 per cent year-on-year respecitvely due to a higher base. In the same period last year, revenue from these geographies had grown by 18.6 per cent and 18.7 per cent respectively.

Sequential pain

While annual growth numbers were healthy, the sequential performance was flat. Compared with the March 2019 quarter, the company’s revenue in the June 2019 quarter fell 0.4 per cent. The banking, financial services and insurance (BFSI), manufacturing, and retail and consumer business industries — which make up over 50 per cent of the company’s revenues — all fell sequentially. BFSI revenues in rupee terms fell 0.8 per cent to ₹14,978 crore, manufacturing fell 0.4 per cent to ₹4,041 crore and retail fell by 0.6 per cent to ₹6,442 crore.

Higher employee costs due to appraisals in April and higher sub-contracting costs led to a rise in expenses; this impacted TCS’s consolidated net profit.

There was also higher depreciation charge during the quarter, as the company switched to a new accounting standard on leases. But a high other income of nearly ₹500 crore helped the company report a marginal increase in its net profit.

A strengthening rupee and salary hikes impacted the company’s operating margin, which fell by nearly 90 basis points sequentially to 24.2 per cent. This is the third consecutive of margin decline for the company.

Retail, BFSI stress

The management indicated that after past growth, the slowdown in the company’s retail business during the quarter was due to Sears shutting many stores. The management thinks this trend is a one-off, as brick and mortar stores will continue to invest in technology to compete with e-commerce players.

BFSI is seeing some stress in financial services in Europe, but TCS is hoping that its position as an industry leader will help it overcome any slowdown in spending. Back home in India, TCS is continuing to see strong growth in public sector projects.

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