By Shalini Pandey
Tata Consultancy Services Ltd.s quarterly profit fell the most in two years. The reasons, in all probability, include a stronger rupee and higher wage costs. By the end of three months in June, profits had declined by 10 % touching a new low of Rs 5,945 crore, according to its Stock Exchange filing.
TCS’ statement of declining profits
With each passing quarter, revenue growth has gone downhill. The operating margin fell to a lowly 23.4 percent in the June quarter from 25.7 percent in the March quarter. Total revenue declined 0.2 percent to Rs 29,584 crores from Rs 29,642 while rising marginally by about 1 percent on a year-on-year basis. Dollar revenue, however, grew 3.1 percent to $4.59 billion.
Operating profit, or earnings before interest and taxes, dropped 9.3 percent while the EBIT margin decreased by 230 basis points to 23.4 percent. A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument with one basis point being equivalent to 0.01%. With the kind of price deterioration that the IT industry has seen lately, the performance of TCS was on expected lines, said Mayank Babla, a research analyst at KR Chocksey, wealth management firm.
What went wrong with TCS?
A stronger rupee during the quarter resulted in a loss of Rs 650 crore in revenue, Rajesh Gopinathan, MD and CEO, said at a media conference in Mumbai. The Indian rupee appreciated by 0.6 percent against the dollar in the three months ended June. According to Gopinathan, increasing salary has led to a hike in wage costs, thereby bringing down the margin to 150 basis points.
The sector is facing challenges not only in the business environment but also in the form of stricter work permit regimes in countries like US, Singapore, Australia and New Zealand. As the US hardens its stance on outsourcing, IT firms are under pressure to hire local workers instead of taking Indian employees on work visas to client sites. Higher on-site hiring will mean higher costs as the wages payable to the US employees will be much higher than that paid to the H-1B visa holders.
TCS witnessed a decline in the operating profit across all its business verticals. The banking and financial services vertical, a 40 percent contributor to the companys revenue, saw an operating profit fall of 6.1 percent from the previous quarter.
The company also reported a net decline in the employee headcount, a first in over 30 quarters. TCS attrition rate, which broadly means employee or staff turnover, rose to 11.6 percent in the last 12-month basis from 10.5 percent in the previous quarter.
The retail segment does not look promising with profitability declining by 8.2 percent. This is due to the physical stores facing stiff competition from the online vendors.
Not all is unwell: hopes for TCS
The revenue from digital services like analytics and cloud increased 7.6 percent during the quarter. It now contributes almost 19 percent to the outsourcer’s top line. The TCS chief said the company is witnessing stronger demand for small digital projects.
The company has added 8 clients in the above-$1-million band, 12 in the above-$10-million band and one new client added to $50-million-plus and $100-million-plus bands each. Although the currency volatility was comparatively lower than the American markets, the performance in European markets was a standout with revenue growing by 5.9 percent. This is perhaps the only silver lining to the dark clouds looming over TCS.
Speculations about TCS’ future
The future looks bleak, with nothing exciting to look forward to since fast-growth segments account for less than a fifth of revenues and are too small to take the needle on the path of growth. This is particularly difficult with the onset of competition as specialist firms with digital offerings are taking share away from traditional outsourcing companies such as TCS in this segment.
Featured Image Credits: Visual Hunt