TCS kicks off earnings season — net profit misses Street estimates as worsening attrition bites into margin

Tata Consultancy Services (TCS) on Friday kicked off the corporate earnings season by reporting a net profit of Rs 9,478 crore for the April-June period, which fell short of Street estimates. The net profit declined 4.5 percent as compared with the previous quarter, as employee costs and high attrition continued to eat into its margin despite high demand.

India's largest software services exporter reported a revenue of Rs 52,758 crore for the three month period — up 4.3 percent on a quarter-on-quarter basis.

Revenue in dollars increased 1.3 percent sequentially to $6,780 million, according to a regulatory filing. Analysts in a CNBC-TV18 poll had estimated its quarterly revenue at $6,812 million.

Revenue growth in constant currency terms came in at 3.5 percent on quarter, as against analysts' expectation of 3.5-4 percent.

“We are starting the new fiscal year on a strong note, with all-round growth and strong deal wins across all our segments. Pipeline velocity and deal closures continue to be strong, but we remain vigilant given the macro-level uncertainties. Our new organisation structure has settled in nicely, getting us closer to our clients and making us nimbler in a dynamic environment," said Rajesh Gopinathan, CEO and Managing Director, TCS.

TCS added nine clients to the $100 million-plus band during the quarter, and 19 to the $50 million-plus category.

Gopinath also said the company remains confident in the resilience of technology spending and the secular tailwinds driving its growth.

TCS' attrition rate in the IT services unit worsened to 19.7 percent in the quarter ended June, from 17.4 percent in the three months prior. The company added 14,136 employees during the quarter, taking its workforce past the 6 lakh milestone.

TCS CFO Samir Seksaria said it has been a challenging quarter from a cost-management perspective.

"Our Q1 operating margin reflects the impact of our annual salary increase, the elevated cost of managing the talent churn and gradually normalising travel expenses. However, our longer-term cost structures and relative competitiveness remain unchanged, and position us well to continue on our profitable growth trajectory,” he said.

Market expert Prakash Diwan said there is clearly a miss on the margin front. Constant-currency revenue growth came at the lower end of expectations, which is disappointing, he told CNBC-TV18.

"There was always this underlying sliver of hope that something positive would happen on attrition and it might not be as bad as it seems. But in terms of a cost impact, it does seem to be fairly serious. It will continue to exert pressure on the margins even going forward," he added.

The TCS board declared an interim dividend of Rs 8 per share.

TCS shares gave up intraday gains in a choppy session ahead of the release of the IT major's quarterly results.

Diwan expects a mild negative reaction to the company's quarterly performance on Dalal Street on Monday due to the margin miss.