Tata Consultancy Services Ltd (TCS), which is India’s biggest listed company by market capitalization, for the third quarter ending December, has posted strong profit. The investors are recommended “Buy” on the stock.
The December quarter is generally a seasonally weak quarter for Indian IT firms due to year-end holidays in major Western markets, in the U.S. and Europe, the largest markets for Indian IT companies. Software exports to the U.S. contributes over 60% of the revenue of the $167-billion Indian IT outsourcing industry. The company has posted a record quarterly profit on the back of gains in its key banking, financial services and insurance (BSFI) division and said it was well positioned for 2019 and has a strong pipeline of client orders.
Further, TCS has continued to report strong revenue from digital services, which is now contributing about one-third to the topline. The company also continued to increase its headcount, which reflects a more sustainable demand scenario.
TCS Q3 FY 201819 Results
TCS has reported 20.8 percent rise in revenue to 373.38 billion rupees. TCS reported a 1.8 per cent sequential rise in revenue in constant currency terms and 0.67 per cent increase in dollar terms. BSFI’s revenue has surged 23 percent in the third quarter. TCS has reported the net profit of 81.05 billion rupees ($1.15 billion) compared with 65.31 billion rupees a year earlier. However, it is lower than the analysts’ expectations of a profit of 82.19 billion rupees, according to Refinitiv data.
On the other hand, on the back of lesser number of working days due to the festive season, the momentum in client addition slowed during the third-quarter. After a strong addition of four clients in the $100 million and above billing slab in the previous quarter, the company’s client count rose by just one to 45 in the December 2018 quarter. The number of clients in the $20-million and above category fell by two to 211 after posting a sharp rise of seven clients in the prior quarter.
The total headcount was 4,17,929 at the end of December 2018 and the company has added 22,931 employees in FY19 so far, which is much stronger than the addition of 11,775 in the whole of the previous fiscal.
Margins Fell
Earnings before interest and tax stood at 25.6% of revenue, about 100 basis points lower than consensus estimates on the Street. A basis point is 0.01%. The employee and sub-contracting costs rose last quarter, which is far more than expected. Moreover, Gopinathan told analysts that TCS plans to participate aggressively when it finds a demand opportunity, which could affect margins in the interim. However, TCS has a higher margin than its peer Infosys.
The investors look for growth and momentum over strong margins. TCS had secured deals worth $5.9 billion last quarter, which is higher than the $4.9 billion worth deal wins in each of the preceding quarters. The key BFSI vertical has showed its growth recovery, and as per the management the momentum is expected to continue. The investors are recommended “Buy” on stock with a price target of Rs. 2300 for a horizon of one year.
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