Tata Consultancy Services Ltd (TCS) reported a 7.4% rise in quarterly profit from a year earlier, slightly below analysts’ estimate, as rising employee costs squeezed earnings even as demand remained robust.
Net profit rose to ₹9,926 crore in the quarter ended 31 March from ₹9,246 crore in the year earlier. That trailed the ₹10,077 crore consensus profit estimate in a Bloomberg survey. Revenue for the March quarter grew 15.8% from a year ago to ₹50,591 crore, beating the ₹50,249 crore consensus Bloomberg estimate. For FY22, revenue stood at ₹191,754 crore.
“The demand environment continues to be very strong, and the services we have invested in are resonating very well in the market. Technology budgets will be among the last to be squeezed,” said Rajesh Gopinathan, chief executive and managing director of TCS.
Indian IT companies have reported blockbuster earnings during the pandemic as demand for digital and cloud computing services soared. But as they raced to hire people with the required skillsets to keep up with the flood of orders, salary budgets had to be raised substantially to keep employees from jumping ship and recruiting new ones, squeezing margins.
TCS’s operating margin remained stable at 25% due to supply-side headwinds. Samir Seksaria, chief financial officer, told reporters that while some volatility is expected in the short term, TCS will double down on the operating levers in the medium term to reach the optimum levels of margins.
Gopinathan said the company’s new organizational structure, effective 1 April, revolves around doubling the focus on customers and making sure TCS is relevant to its clients. “The approach is not cost-based but it is about building ourselves for the opportunities in the long term. It is a logical evolution of the TCS operating model.”
The dollar revenue for the March quarter grew 14.3% in constant currency from a year earlier to $6.7 billion on the back of highest-ever order book worth a total contract value (TCV) of $11.3 billion. It reported its highest-ever incremental revenue addition of $3.5 billion and TCV of $34.6 billion for FY22.
The company’s earnings validate analysts’ strong growth expectations amid soaring demand for digital and cloud transformation initiatives. According to Nasscom’s ‘Tech CEO Survey 2022’, 72% of CXOs expect 2022 to be another growth year driven by digital demand and higher investments in research and development.
The banking, financial services and insurance (BFSI) sector, the largest vertical for TCS, grew 12.9% annually in constant currency and contributed 31.9% to the total revenues during the March quarter. The retail and consumer packaged goods (CPG) sector, the second-largest vertical, grew 22.1% annually and contributed 15.4% to the total revenues during Q4.
“TCS’s results are not very surprising considering its track record and strategy over the last few quarters. The company is focusing more on driving agility in organizations by using integrated and agile operations. TCS’s integrated operations and intelligent automation strengthens market differentiation for the cognitive business operations (CBO) where TCS is driving improved operational efficiency. The organization has to drive faster creative destruction of its existing legacy workload, which may impact its future growth. In addition, large enterprise customers continue to remain TCS’s sweet spot, that are accompanied by their own set of advantages and disadvantages,” said D.D. Mishra, senior director analyst, Gartner.
On a trailing 12-month basis, the attrition rate increased to 17.4% in the March quarter from 15.3% in the preceding three months as supply continues to lag demand for skilled tech talent in the industry. The company made a net addition of 35,209 employees during the quarter to close FY22 with a headcount of 592,195 employees. TCS declared its earnings after the end of trading on Monday. Ahead of its results, the shares rose 0.26% to ₹3,696.40 on the BSE.