Mixed Q1 for TCS; revenue in line, profit below estimates

Tata Consultancy Services (TCS), the country’s largest software services exporter, kicked off the earnings season on Friday with a mixed set of numbers for the first quarter ended June 30 with revenue coming in line with the Street’s estimates, but missing the operating margins and net profit expectations. While the constant currency (CC) revenue growth of 3. 5% in the June quarter was weaker sequentially than 14.

3% in the March quarter, attrition during the quarter surged 230 basis points to inch closer to 20%. The company made a net employee addition of 14,000 during the quarter. The company reported a 4.

5% decline in net profit to Rs 9,478 on a quarter-on-quarter basis for the three months of April-June 2022. The revenue during the quarter was up 4. 3% to Rs 52,758 crore, aided by about 220 basis points on the dollar and about 80 basis points due to the rupee’s movement.

However, the impact of salary hikes, subcontracting usage and supply side challenges were felt on the operating margins, which declined 186 basis points sequentially to 23. 1%, leading to an operating income of Rs 12,186 crore, down 3. 5% q-o-q.

There was a 150 basis points impact of promotion hikes pencilled into the margins this quarter, while significant cross currency variation, because of the strengthening of the dollar against most of the currencies had a 25 basis points positive impact on margins. While the company maintained its deal win momentum on a year-on-year basis, recording TCV of $8. 2 billion, but on a sequential basis, this a 27% decline from $11.

3 billion recorded by the company in the March quarter. However, Rajesh Gopinathan, CEO and managing director, TCS denied any signs of demand slowing down or recessionary fears impacting technology spends so far. “We are seeing steady demand from our immediate conversations with customers for the short- to medium-term.

We do not see any signs of softening and we are in the middle of the year. ” He added that that continuing client conversations also indicate that the demand for technology is quite robust and it is primarily driven by cloud transition as well as investments in customer experiences and other operating model transformation initiatives both on the growth and transformation and cost optimisation side. The company had a couple of deals in the range of $400 million plus and the rest was a good mix of deals across all sizes, Gopinathan said.

The company’s hiring during the quarter also tapered down a little from the previous two quarters, which Gopinathan attributed to more of a period-to-period difference. “It is a reflection of very high trainee inflow in the last two quarters, so there is enough capacity in the system, and Q1 is traditionally a soft quarter in terms of fresher hiring which picks up in Q2 and Q3,” he said. Samir Seksaria, chief financial officer, said, “It has been a challenging quarter from a cost management perspective.

Our Q1 operating margins reflects the impact of our annual salary increase, the elevated cost of managing the talent churn and gradually normalising travel expenses. ” On the HR front, TCS added 14,136 employees to its rolls on a net basis. The total headcount stood at 606,331.

However, the attrition rose by 230 basis points to 19. 7% during the quarter. Milind Lakkad, chief HR officer, TCS said, “Following our annual compensation review, employees received salary increases of 5 to 8%, with top performers getting even bigger hikes.

Continued hiring momentum resulted in a milestone quarter, with the employee strength crossing the 600,000 mark,” he said. .