TCS beats street estimates with 16.2% Q1 revenue growth; margins disappoint

Net profit misses estimate as salary hikes impacted margins by 150 bps

The results of Tata Consultancy Services (TCS) for the first quarter of FY23, declared on Friday, beat street estimates on the top line and continued to keep pace with the growth momentum it delivered in FY22.

TCS’ net profit grew 5.2 per cent year-on-year and 2.5 per cent sequentially to Rs 9,478 crore in Q1FY23, but missed the estimate of Rs 9,850 crore, according to the Bloomberg data. Revenue for the quarter came in at Rs 52,758 crore, up 16.2 per cent YoY and 4.28 per cent sequentially.

While the company’s Q1 revenue was ahead of the Bloomberg estimates of Rs 52,486 crore, the margins for the quarter came in at 23.1 per cent, down 2.4 per cent year on year. The impact of salary hikes on margins was 150 basis points, and that for travel cost was 30 basis points.

“TCS earnings reflect that chief investment officers are actively seeking help from their IT services partners to accelerate their digital journey and improve their customer experience while mitigating business risks. High priority areas of IT investments will include Cloud, AI/ML, application modernisation, security, data and analytics, and the services industry will see revenue growth in these areas. Gartner estimates that end-user spending on the IT services industry will grow 6.2 per cent in 2022. IT demand is poised to be robust in the remaining part of 2022,” said Naveen Mishra, senior director analyst, Gartner. 

From an outlook perspective, the company signed a total contract value of $8.2 billion. The order book compared to Q4FY22 is low because the previous quarter had two large deals.

On the outlook and demand environment, Rajesh Gopinathan, chief executive officer and managing director, said: “Based on the conversation we have had with clients we see steady demand. We are constantly taking polls to understand if there are any early indications of softening. We are already in the middle of the year, and there are no indications of that. We remain vigilant, given the macro-level uncertainties.”

Ashis Dash, analyst, Sharekhan by BNP Paribas, said: “We believe TCS is well-positioned to benefit from market opportunities, given its solid capabilities, end-to-end service offers and a strong presence across technologies. Further, TCS is likely gain from a vendor consolidation exercise even in an adverse macro environment. We have a buy rating on the stock.”

However, not all were happy with the numbers.

Aditi Patil, research associate at Prabhudas Lilladher, in her first cut report, said: “Miss on both revenue and margins.”

In dollar terms the company’s performance disappointed the street. Though the dollar revenue came in at $6.78 billion, a growth rate of 15.5 per cent in constant currency year-on-year, on a sequential basis, revenue grew 1.3 per cent. In terms of geographies, the UK and continental Europe witnessed the stress of the Russia-Ukraine conflict. The UK was down 3.3 per cent and continental Europe declined 0.7 per cent.

Importantly, attrition continued to peak, coming in at 19.7 per cent for the quarter, and much higher than the 17.4 per cent in Q4FY22. The company had a net headcount addition of 14,136 during the quarter, taking the total to 606,331. The company attributed the peak in attrition to seasonality.

N Ganapathy Subramaniam, chief operating officer and executive director, said: “The investments we made in people, upskilling efforts and select lateral hiring et al helped manage the talent turnover with minimum impact on our operations. During the quarter, we have resumed in-person meetings, and hosted several clients at our facilities. We are bringing in more of our associates back to our development centres, and it is steadily increasing at all levels. On the sustainability front, we have signed our commitment to SBTi version 5 standards during the quarter and are making steady progress towards our net zero journey with tremendous alignment to this initiative across our associates.”

The company expects attrition to slow from Q3 onwards.

Milind Lakkad, chief HR officer, said: “Our investment in strategic talent development initiatives and the linking of learning to career development have energised our workforce. Following our annual compensation review, employees received salary increases of 5-8 per cent, with top performers getting even bigger hikes. Our empowering, performance-driven work culture is helping us attract local talent across all our key markets. Continued hiring momentum resulted in a milestone quarter, with the employee strength crossing the 600,000 mark.”