TCS: Revenue growth disappoints again

A 150 basis points fall in realisations too weighed on the top-line

Tata Consultancy Services' (TCS) constant currency revenues fell short of expectations for the June 2015 quarter as well. This metric grew 3.5 per cent sequentially compared to street expectations of 4-4.2 per cent in a seasonally strong quarter. Notably, this is the third straight quarter where the company has witnessed pressure (or missed) on its revenues.

Attrition too went up to 15.9 per cent (the eighth consecutive quarter of increase), something the Street will make note of. Even as Diligenta (TCS's UK-based insurance arm) continues to de-grow and is likely to see a lumpy performance in the near term, weakness in Japan and Latin America has pulled down the revenue growth.

Although telecom, which forms 8.6 per cent of revenues, grew at a robust 9.6 per cent sequentially in the quarter, it is largely due to the low base. In March 2015 quarter, telecom revenues had fallen 10.2 per cent. Going forward, it is expected to remain volatile and will be a key monitorable. All other verticals and regions, especially US and Europe, grew at a healthy pace.

Notably, TCS is the bellwether for the Indian IT sector and the Street had pegged its constant currency revenue growth ahead of its peers such as Infosys, Wipro and HCL Technologies. It will now be keenly watching if any of these companies can grow this metric better than TCS.

A 150 basis points fall in realisations too weighed on the top-line. However, the management has indicated that pricing continues to be stable given that realisations are a function of host of factors such as offshore revenue mix, amongst others. The Street though may keep this on watch as well.

Favourable rupee, however, aided consolidated revenues in rupee terms which stood at Rs 25,668 crore (Rs 256.68 billion) (up 6 per cent sequentially) and hence, came largely in-line with Bloomberg consensus estimate of Rs 25,670 crore (Rs 256.7 billion).

Lower-than-expected contraction in EBITDA margin and forex gains (Rs 190 crore) enabled TCS to post better net profit in the June 2015 quarter. June quarter witnessed full impact of wage hikes which had a negative impact of 190 basis points on margins. This was partly offset by favourable rupee (positive 70 basis points) and operational efficiencies (30 basis points).

Thus, EBITDA margin contracted 110 basis points sequentially to 28.1 per cent versus analysts' expectations of 198 basis points sequential contraction. As a result, profits at Rs 5,709 crore (Rs 57.09 billion) came in better than estimates of Rs 5,509 crore (Rs 55.09 billion).

The results of TCS, which fell 3 per cent on Thursday, came post market hours. At the closing price of Rs 2,521, the scrip trades at premium valuation of 20 times FY16 estimated earnings. However, given its strong execution track record and consistent financial performance, most analysts remain positive and believe this premium will continue.

Going forward, management continues to invest in digital and other growth avenues such as Japan, Latin America and Europe. It remains positive on the road ahead. While this lends some confidence, a few analysts believe recovery in revenue growth may still be a couple of quarters away.