TCS Q1 net profit rises 5 pc to Rs 9,478 cr; sees no impact of likely recession immediately

Mumbai: The country's largest software exporter TCS on Friday reported a 5.2 per cent rise in the June quarter net profit to Rs 9,478 crore, restricted by the impact of annual wage hikes and promotions that took operating profit margins to multi-quarter lows.

The Tata Group company, which is the first in the country's over USD 220 billion software exports industry to report earnings, however, said that it does not see any adverse business impact because of worries around recession in its key markets.

It reported a 16.2 per cent growth in the revenue at Rs 52,758 crore for the quarter, with all the big geographies and business segments reporting strong numbers, but it was operating profit margins, which slid down to 23.1 per cent – much lower than the aspirational band of over 26 per cent – that hurt the profit growth.

Its managing director and chief executive Rajesh Gopinathan hinted that this is the bottom for the margins, attributing the fall to annual wage hikes and promotions, which drilled a 1.50 per cent hole.

Chief financial officer Samir Seksaria exuded confidence that it will be able to claw back and take the operating profit margin number up with every quarter.

At a time when worries are being expressed about recessionary pressures in markets like the US, which is the biggest market for TCS, Gopinathan said it has been doing client surveys to look for any early signs of softening in demand for its services.

"We are seeing steady demand from our immediate conversations with customers for the short term to medium term. So, all projects that are currently going on, pipeline conversions – all of that indicates a steady demand environment," he told reporters at the company headquarters here.

"In senior-level discussions, there is increasing discussion about the recession, no different from what you and I are reading in newspapers. We don't see an immediate footprint of it on our demand side. From a pipeline perspective also, the pipeline build is quite strong and the nature of deals is also remaining strong," he added.

Gopinathan also said that he sees North America to be the geography from a business growth perspective in the year ahead.

The company clocked a total contract value of USD 8.2 billion for the quarter, which included two large deals of over USD 400 million.

Chief operating officer N Ganapathy Subramaniam said there will be fewer large ticket deals of over USD 1 billion going ahead, and stated that the TCV will range between USD 7-9 billion every quarter even though it touched USD 11 billion on the back of two large deals recently.

On the margins improvisation front, Seksaria said the company is looking to press levers, including upping realisation and pricing, rupee depreciation (currency movements gave a 0.25 per cent benefit to operating profit margin in Q1) and optimising sub-contracting costs, which have gone up due to higher attrition that came at over 19.5 per cent.

Gopinathan said he expects attrition to remain high for another quarter and stabilise in the second half of the fiscal year.

The company added only 14,000 people on a net basis in the reporting quarter because of the excess capacity that it has built up in the last one year, he said, making it clear that it is not driven by any business growth expectations.

Seksaria said the company hired a lot of lateral talent during the quarter and is maintaining its target of hiring 40,000 freshers for the fiscal year.

COO Subramaniam said its clients in the retail and consumer products space -- who are most at risk if a recession were to play out -- do not mean to pull the plug on IT spends because of the adverse business climate as everyone wants to drive technology projects for easier working and customer experiences.

The COO said he does not expect any slowdown of demand or even re-prioritising of spending by clients in the near term, at least in this financial year.

The company's board declared an interim dividend of Rs 8 per equity share at the meeting held on Friday.

Domestic brokerage Prabhudas Lilladher said the company has missed on both revenue and margins in the June quarter results.

The company scrip closed 0.67 per cent down at Rs 3,264.85 apiece on the BSE on Friday, against gains of 0.56 per cent on the benchmark.