Comment. TCS Q2FY21: Broad-based demand recovery across verticals, geographies

BL Research Bureau

With the earnings season underway, Tata Consultancy Services (TCS) is the first Indian Information Technology services company to report earnings for the quarter ended September 30, 2020. Helped by a recovery in demand for IT services, mainly due to an accelerated need for digital services by clients, TCS posted a 6.7 per cent quarter-on-quarter rise in consolidated net profit to Rs 7,475 crore.

The company’s management said that they were “pleasantly surprised” by the recovery in demand that happened ahead of what they had expected. Although they are not out of the woods yet, the demand recovery is sustainable, the management said. The company had earlier said that it expected demand for IT services to pick-up from the quarter ended December 31, 2020 onwards.

Consolidated revenues during the quarter came in at Rs 40,135 crore, up 4.7 per cent quarter-on-quarter, helped by a pick-up in revenues in its two mainstay verticals—banking, financial services & insurance and retail and consumer products group (CPG). These two verticals together make up nearly 47 per cent of TCS’s revenues. In dollar terms, the revenues were up 7.2 per cent quarter-on-quarter to $ 5.42 billion.

Growth across regions

In terms of geographies, the company witnessed growth across all the geographies that it operates in. There has been a pick-up in demand from the Americas, which consists of North America and Latin America. Revenues in dollar terms in North America rose 4.1 per cent sequentially, while in Latin America rose 7.2 per cent. These two regions make up for over half of TCS’s revenues.

The UK and Continental Europe, which together make up for nearly 32 per cent of TCS’s revenues, saw dollar revenues rise sequentially by 8.6 per cent and 12 per cent, respectively.

Verticals

Most of the sequential revenue growth during the quarter came in from good demand recovery in the BFSI and retail and CPG verticals. Apart from these two, the life sciences and healthcare vertical continued to report decent quarterly revenue growth. This vertical was the only one that reported double-digit (12 per cent) revenue growth in dollar terms.

The only outlier during the quarter was the communication and media vertical, which saw dollar revenues slide nearly 2 per cent during the quarter.

Operating metrics

Operating margins came in at 23.2 per cent (vs 23.6 per cent in June quarter). However, there was an exceptional item relating to a provision of Rs 1,218 crore for any payout that might be necessary due to a court order in a trade secret lawsuit filed by EPIC against TCS. If we adjust for this one-time exceptional item, the operating margins came in at 26.2 per cent. The fall in attrition rate to 8.9 per cent now vs 11.1 per cent in the June quarter helped the company’s margins.

Whether this level of margins will be sustainable over the next two quarters is to be seen. TCS said that it will start salary hikes from October 1, 2020. This could have an impact on the company’s margins. Also, the quarter ended December 31, 2020 is usually a seasonally weak quarter. This factor could also play spoilsport.

In terms of deal wins, the company bagged deals with a total contract value of $ 8.6 billion, which consists of a deal with Phoenix Group worth $2.5 billion. It added one client to its $100 million revenue bucket which rose to 49. Clients earning revenues of $50 million dropped by three from the previous quarter to 97.