TCS Q2 net profit up 8.4%,  tops  estimates

Net profit rose to ₹10,431 crore in the three months ended 30 September from ₹9,624 crore in the year earlier, the company said on Monday. That beat the ₹10,290 crore consensus profit estimate of analysts surveyed by Bloomberg.

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Revenue rose 18% to ₹55,309 crore from ₹46,867 crore a year ago.

TCS and smaller rivals such as Infosys Ltd and Wipro Ltd have benefited from the demand for digitization and cloud computing services after the pandemic as clients splurged on technology to connect with customers and employees. However, analysts warned that companies in the US and Europe might soon cut spending on tech projects as fears of a global recession mount.

Still, TCS reported an order book of $8.1 billion, a growth of 15.4% from a year earlier.

“Demand for our services continues to be very strong. We registered strong, profitable growth across industry verticals and in all our major markets. Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements,” said Rajesh Gopinathan, managing director and chief executive of TCS, in a statement. “As clients prepare for a more challenging environment ahead, technologies like cloud now have to be fully leveraged to realize the promised value.”

Shares of TCS rose 1.84% to ₹3,121 on Monday, ahead of the quarterly earnings announcement. The company said it would pay shareholders a dividend of ₹8 per share.

On the operational front, earnings before interest and taxation rose 10.8% to ₹13,279 crore from a year earlier. The operating margin widened to 24% in the September quarter from 23.8% in the year earlier.

TCS saw broad-based growth across verticals. Retail grew 22.9% in constant currency terms, followed by communications, media, and information (CMI) at 18.7%.

Among markets, TCS registered a 17.6% growth in North America, 14.1% in continental Europe and 14.8% in the UK. It saw a 16.7% rise in the Indian market, while Latin America grew 19%, MENA (the Middle East and North Africa) rose 8.2%, and Asia-Pacific grew 7%.

“We are making our way towards achieving our operating margin priority for the year, aided by good growth, the flattening of the workforce pyramid, improving productivity and currency support. The headwinds from supply-side challenges are abating, so that sets us up well for the seasonally weak second half of the year,” said chief financial officer Samir Seksaria.

TCS added 9,840 employees in the September quarter, taking the total headcount to 616,000.

“We have honoured all job offers. Our investments in capacity building and organic talent development have allowed us to grow our business ahead of headcount addition this quarter,” said Milind Lakkad, chief human resources officer at TCS.

Commenting on the 21.5% employee attrition rate this quarter, Lakkad added, “We believe our quarterly annualized attrition has peaked in the second quarter and should see it taper from this point, while compensation expectations of experienced professionals moderate.”

While TCS beat market estimates for the quarter, analysts warned that orders might slow down in the months ahead.

Mitul Shah, head of research at Reliance Securities, said IT services “would not remain immune to worsening global macros in terms of rising currency headwinds and likely cut on spending.” This cut in spending in key markets will likely lead to sequential declines over the next two quarters, he said.

Akshara Bassi, an analyst for global cloud and servers market at Counterpoint Research, said US interest rate hikes, coupled with inflationary headwinds in North America, “may lead to a sequential decline in overall revenues and earnings in December and March quarters.”

Reliance Securities’ Shah estimates TCS’s revenue growth to “taper to low double-digit in FY24″. There could also be a “sequential decline in the order book, lower staff addition, and lower pricing power.”

However, IT services firms may see an uptick in demand due to the implementation of 5G services worldwide.

Bassi of Counterpoint said most numbers reported for the quarter are “coming off the completion of orders they have received across international markets over the past two years.”

“This reflects their performance and demand for digital transformation among organizations across the world through the pandemic period,” she said.

Going forward, the expected cut in tech spending in TCS’ key markets may lead to sequential declines in the next two quarters. Counterpoint’s Bassi said the US Fed rate hike, coupled with inflationary headwinds in the North American market, “may lead to a sequential decline in overall revenues and earnings in the December and March quarter.”

Shouvik Das contributed to the story.