TCS: Resilient performance

ata Consultancy Services (TCS), India’s largest software exporter, fiscal fourth quarter to March 2020 performance was a combination of hit and miss.

While profit margin fell inline, revenue growth was short of expectations.

TCS reported a marginal dip in its fourth quarter net profit to Rs 8,093 crore compared with Rs 8,152 crore in the year-earlier period as the COVID-19 pandemic completely reversed the positive momentum that the company had started seeing in some of its biggest verticals in the first half of the quarter.

The fall in profit came on a 5.09% growth in revenue to Rs 39,946 crore in the quarter. Revenue growth was led by life Sciences & Healthcare (+16.2%), Communications & Media (+9.3%) and Manufacturing (+7%). Companies revenue from the BSFI segment fell 1.3%.

BFSI segment Q4 revenue fell short of expectations largely due to supply-side factors (regulatory & compliance hurdles for transition to remote delivery) accentuating in the last fortnight of 4Q and the vertical contributed 57% to sequential revenue decline.

Geographically, growth was led by Europe (11.9%) and U.K. (5.4%), Latin America rose 3.9%, Asia Pacific grew 3.5% and MEA, 1.3%. North America inched up 0.2% while growth from India declined 1.9%.

Tata Group company is yielding rich rewards from the Secure Borderless Workspaces (SBWS) framework which has now enabled close to 90% of its employees to work remotely and securely.

It has already got appreciation from 500+ clients for its top-class delivery despite the impact of lock-down.

TCS witnessed very strong deal closures during the quarter. In fact, the order book this quarter is the largest ever, from the time it has started reporting the metric.

Organisations across the world are realising the need for operational and systems resilience. Many of the large deals signed during the quarter address precisely that need.

They are core transformation programmes that leverage the power of technology to make our customers’ operations leaner, faster and more resilient.

The most interesting part was the earnings guidance for the coming quarters. It believes that impact of Covid-19 pandemic on IT spends would be similar to that at the time of GFC. It expects Q1FY21 to see the peak of the impact.

Given the deal- wins/pipeline and its SBWS model its expect H2FY21 to see similar revenue (in absolute terms) as in H1FY20. TCS forecast Q1FY21 revenue decline of 4% QoQ resulting in a 2.2% YoY decline for FY21.

TCS expects BFSI segments supply constraints to moderate in the current quarter as client approvals for ‘secure borderless workforce’ delivery (WFH) are obtained, while demand-related dents are expected to aggravate.

Vertical wise, revenue declined in BFSI, retail and manufacturing. The decline in BFSI was due to supply side challenges and lower client approval on work from home.

On the deal front, TCS won TCV worth US$8.9 billion in this quarter on the back of two large deals won in previous quarter (US$1.5 billion in Phoenix, US$1.7 billion from Walgreens)

Going forward, we expect FY21E margins to be under pressure mainly due to revenue decline.

However, to mitigate this, the company is planning to rationalise cost by putting a hiring freeze (except the 30000 offers that the company has already made), no salary increments and other cost cutting initiatives

Net net we believe that the company is likely to be impacted by the carona viris outbreal atleast for the next 2 quarters ahead after which growth is likely to resume but full normalcy is expected only from FY22 onwards.

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