Q3 earnings season kicks off: TCS revenue rises 19%, net profit up 11%

For a traditionally weak Q3 quarter, India’s largest IT services and technology firm Tata Consultancy Services (TCS) managed to report a strong performance, even as the impact of a challenging global macroeconomic environment was evident on deal flows.

For Q3FY23, TCS reported 11 per cent year-on-year (YoY) growth in net profit, which stood at Rs 10,846 crore. Revenue for the quarter came in at Rs 58,229 crore, up 19.1 per cent YoY in reported terms and 13.5 per cent YoY in constant currency terms. Sequentially, revenue was up 5.2 per cent.

Though TCS beat the Bloomberg estimate on revenue (Rs 57,207 crore), the company could not meet the net profit expectation (Rs 11,064 crore).

Growth for the quarter was broad-based in terms of both geography and verticals and it was further propelled by cloud demand and market share gains. However, the company did not quantify the cloud momentum.

TCS does not give guidance but the management said that it is confident about the demand scenario. It further said technology spends are intact.

This quarter in terms of demand has been about different markets behaving differently. North American demand continues to be vibrant. The UK is a challenging operating environment, and Europe is the only market where decision-making is getting impacted due to the current geopolitical challenges,” said Rajesh Gopinathan, CEO and MD, TCS.

Gopinathan said: “Looking ahead and beyond current uncertainties, our longer-term growth outlook remains robust.”

The ongoing global uncertainty did have a major impact on TCS’ Q3 performance. First, total contract value (TCV) came in at $7.8 billion, though it was in the middle of the firm’s $7-9 billion range. TCS managed to maintain its TCV above $8 billion over the past three-four quarters. The book-to-bill was 1:1, whereas it was 1:2 in the previous quarter.

While the management did not give clarity on budget for FY24, it reiterated that the deal pipeline, so far, has not been impacted. “The overall demand scenario has not changed significantly.

We did see furloughs impact this quarter. But so far nothing to call out as a worry,” said N Ganapathy Subramaniam, COO and executive director, TCS.

Analysts, however, were divided on how to assess the reported numbers. Sanjeev Hota, head of research, Sharekhan by BNP Paribas, said: “Management commentary on demand environment looks hazy for short to medium term, owing to the uncertain global environment. At the current juncture, owing to multiple global headwinds, the outlook for FY24 looks uncertain, but the recovery could be gradual in the coming quarters. Structural growth story for the Indian IT sector remains intact, and TCS being the flagbearer will emerge stronger. Notwithstanding near-term volatility, we remain constructive on TCS for the long term.”

TCS earnings maintain momentum in the seasonally weak quarter. Deal wins’ TCV at $7.8 billion, 2.6 per cent growth YoY, was a tad soft largely due to tepid activity outside the US and the UK. We will await management comments on whether this weakness was skewed or broad-based outside the US,” said a first cut note from Elara Capital.

On the margin front, the company reported an operating margin at 24.5 per cent. The margin had a 70-basis point positive impact of forex; execution efficiency brought in positive 30 basis points. But these were offset by higher third-party costs and the impact of the return to normalcy.

Samir Seksaria, CFO, TCS, said he was confident that the company would exit FY23 with a margin of 25 per cent. He also acknowledged that the elevated expectation on salaries has come down and the supply-side constraints have eased.