TCS Q3 profit misses market expectations; but sees business environment improving

MUMBAI: Tata Consultancy Services posted muted results for the third quarter of the fiscal missing market expectations by a whisker but had good tidings for the future when it expects to rebound on the back of strong growth in key sectors like retail and in major markets like the US.

India’s largest software exporter reported a net profit of $1.01 billion on revenue of $4.78 billion for the quarter ended December. In rupee terms it reported a profit of Rs. 6,531 crore on revenue of Rs. 30,904 crore, a sequential revenue growth of 1.3 % from the previous quarter.

"We have delivered strong results in a seasonally slow quarter,” said CEO Rajesh Gopinathan but cautioned that the company was in “wait and watch” mode with regard to revenues from its largest sector – banking and financial services, which recorded a drop of 1.5 %.

Analysts were expecting a profit of $1.02 billion on a revenue of $4.87 billion, according to a Bloomberg poll.

“Overall business environment is improving across verticals. Retail has stated to rebound and we are looking forward to a double digit growth,” said Gopinathan who took charge last February following former CEO N Chandrasekaran’s ascension as chairman of parent company Tata Sons.

TCS's retail sector revenue grew 6.4% and the company said retailers are now leveraging digital technologies to compete with ecommerce giants.

The Mumbai headquartered firm has seen a spike in digital revenue, which accounted for 22.1 % of revenue, up 13.9% from the previous quarter in constant currency terms (after accounting for exchange rate fluctuations).

IT services firms struggling to cope with the upheaval occasioned by increasing automation and rising protectionism in major markets are hoping that digital deals will offset the decline in traditional services.

“As digital deals grow in scale, margin profile will improve. We are optimistic about our margins," said Gopinathan adding that "we (TCS) are at $4 billion run rate on digital."

The company also signed its first deal to bring in revenue of over $50 million in digital this quarter.

Analysts are of the view that the software giant needs to hasten the increase in digital revenue.

"TCS needs to change its perception from a legacy player to a digital player,” said D.D. Mishra, Research Director of Gartner India.

An increase in IT spending expected in the U.S-- following recent tax cuts-- will also boost corporate earnings, company executives said on Thursday.

The company maintained operating margin target of 26-28% for the next fiscal. Operating margin stood at 25.2 % this quarter, up from about 25.1 % percent last quarter.

Urmil Shah, research analyst, Institutional Equities, IDBI Capital said the company’s “sequential growth in the quartier has met our expectations”. “Large deal wins have over 50% of business transformation programmes. This augurs well for FY19." he said.

The company added three new clients who will bring in revenue above $50 million, seven clients who will bring in revenue in excess of $20 million and nine who will contribute over $10 million in revenue. The largest number of new clients—15-- were those who will clock revenue of over $5 million.

In an explanatory note to its third-quarter results TCS said it had also provided for Rs 2,809 crore as contingent liability for a law suit against US software firm, Epic Systems.

Epic had filed a law suit against TCS in 2014 alleging that the company had stolen its intellectual property. In 2016, Epic won a jury award of $940 million. In 2017, the Wisconsin court judge lowered the amount of the award to $420 million to comply with caps on punitive damages in such cases.

“During the current quarter, pursuant to US court procedures, a letter of credit has been made available to Epic for Rs 2,809 crore ($440 million) as financial security in order to stay execution of the judgement pending post-judgement proceedings and appeal. Accordingly, an amount of Rs 2,809 crore is disclosed as contingent liability,” the company said.

TCS said it still intended to appeal the reduced award.

Separately, TCS's CFO V Ramakrishnan said the company is working with trade bodies in the US seeking clarity on a specific tax provision, which analysts have said could create administrative distraction and hurt earnings up to 5-7 %.

Termed as BEAT, an acronym for Base Erosion Anti-Abuse Tax, it is used by US revenue collectors to reduce the ability of large multinational companies using cross-border payments to shift income to their affiliates in lower-taxed countries.

Gartner’s Mishra said, “TCS has a strategy which is in-line with the changing market but it can benefit better by aligning centers of excellence, strategy and execution within the organization."