Tata Consultancy Services (TCS) announced its Q2 results on October 11, 2023. The company reported a net profit increase of 8.7% year-on-year to Rs 11,342 crore. However, its revenue growth was lower than expected, with a year-on-year increase of 7.9%. This performance was below that of its peers. TCS also announced a buyback offer and a dividend payout.
Despite beating analysts’ estimates on net profit and margin, the muted revenue growth raises questions. This article aims to analyze the reasons behind TCS’s subdued revenue growth and its implications for investors. It’s important to note that while TCS’s profit and margin surpassed expectations, the key concern is the slower revenue growth, which could have potential impacts on investor sentiment.
How TCS Performed in Q2 FY 2024
Here’s a comparison of TCS’s key financial figures for Q2 FY 2024, Q1 FY 2024, and Q2 FY 2023:
| Financial Figures | Q2 FY 2024 | Q1 FY 2024 | Q2 FY 2023 |
|---|---|---|---|
| Net Profit (Rs Cr) | 11,342 | 11,074 | 10,431 |
| YoY Net Profit Growth | 8.7% | – | – |
| QoQ Net Profit Growth | 2.4% | – | – |
| Operating Margin (%) | 24.3% | 23.2% | 24% |
| YoY Operating Margin Growth | +301 bps | – | – |
| QoQ Operating Margin Growth | +110 bps | – | – |
| Revenue (Rs Cr) | 59,692 | 59,381 | 55,309 |
| YoY Revenue Growth (%) | 7.9% | – | – |
| QoQ Revenue Growth (%) | 0.5% | – | – |
| Constant Currency Revenue YoY (%) | 2.8% | – | – |
| Constant Currency Revenue QoQ (%) | 0.4% | – | – |
TCS’s net profit for Q2 FY 2024 was Rs 11,342 crore, an increase of 8.7% YoY and 2.4% QoQ, beating analysts’ expectations of Rs 11,095 crore. The operating margin improved by 30 bps YoY and 110 bps QoQ to 24.3%, exceeding analysts’ expectations of 23.9%. However, TCS’s revenue for the quarter was Rs 59,692 crore, an increase of 7.9% YoY but only 0.5% QoQ, missing analysts’ expectations of Rs 60,160 crore. The revenue growth in constant currency terms was 2.8% YoY and 0.4% QoQ, lower than its guidance of 3-4% QoQ and below its peers such as Infosys and Wipro.
Why TCS’s Revenue Growth Was Disappointing
TCS’s lower-than-expected revenue growth in Q2 FY 2024 can be attributed to several factors:
- Seasonality and Supply-side Constraints: TCS faced headwinds from seasonality and supply-side constraints. The company also faced challenges in ramping up some of its large deals due to talent shortages and visa issues in some geographies.
- Slowdown in Key Verticals: TCS witnessed a slowdown in demand from some of its key verticals such as BFSI, retail, and CMT, which account for over 60% of its revenue. The BFSI vertical was down 0.5% YoY and North America grew a mere 0.1%.
- Currency Fluctuations: TCS also faced a negative impact of 1.5% on its revenue due to the appreciation of the Indian rupee against the US dollar and other currencies.
These factors combined led to the disappointing revenue growth for TCS in Q2 FY 2024.
How TCS Managed to Deliver Strong Profitability and Margin
TCS managed to deliver better-than-expected net profit and margin in Q2 FY 2024 due to a combination of factors:
Operational Efficiencies and Cost Optimization: TCS focused on improving employee utilization, driving productivity improvement, and cost efficiency across the organization. This helped TCS expand its operating margin to 24.3%.
Leveraging Digital Capabilities: TCS leveraged its digital capabilities, cloud services, and new technologies to drive higher value for its clients and improve its pricing power. The company now has a 100,000-strong pool of Gen-AI Ready consultants and prompt engineers who are engaged in hundreds of Gen-AI projects for their clients across segments.
Lower Attrition and Higher Retention: TCS also gained from lower attrition and higher retention. The attrition rate was at 14.9%.
Strong Order Book: TCS reported a strong order book of $11.2 billion in Q2 FY 2024, indicating a healthy pipeline of deals for the future.
How TCS Rewarded Its Shareholders with Buyback and Dividend
On October 11, 2023, Tata Consultancy Services (TCS) announced a buyback offer and a dividend payout.
Buyback Offer: TCS announced a buyback of up to 4.09 crore equity shares for an aggregate amount not exceeding Rs 17,000 crore, representing 1.12% of the total paid-up equity share capital, at Rs 4,150 per share. This is the fifth buyback by TCS in six years. The buyback price is at a premium of over 15% to the closing price of Rs 3,610.20 on October 11, 2023.
Dividend Payout: TCS also declared a second interim dividend of Rs 9 per share for the financial year 2023-24. The dividend will be paid on October 27, 2023.
These announcements reflect TCS’s confidence in its business outlook and its commitment to return excess cash to its shareholders.
What Investors Should Expect from TCS Going Forward
TCS’s prospects and challenges for the rest of FY 2024 and beyond are shaped by several factors:
Recovery in Key Verticals: TCS expects to see a recovery in demand from its key verticals such as BFSI, retail, and CMT in the second half of FY 2024, as the pandemic situation improves and clients resume their digital transformation journeys.
Overcoming Supply-side Constraints: TCS is investing in talent development, hiring, and reskilling initiatives to overcome supply-side constraints and ramp up its large deals.
Strong Deal Pipeline: TCS has a strong deal pipeline, diversified portfolio, innovation-led offerings, and a client-centric approach that are expected to benefit the company in the long term.
However, TCS also faces some risks and uncertainties:
Currency Fluctuations: Fluctuations in currency rates could impact TCS’s revenues and profitability.
Regulatory Changes: Changes in regulations could affect TCS’s operations in various geographies.
Competitive Pressures: The IT services industry is highly competitive, and TCS faces intense competition from global IT services companies.
Geopolitical Tensions: Geopolitical tensions could affect TCS’s international operations.
Conclusion
In conclusion, Tata Consultancy Services (TCS) delivered a mixed performance in Q2 FY 2024. While the company reported strong profitability and margin, exceeding analysts’ expectations, its revenue growth was disappointing. TCS announced a buyback offer and a dividend payout to reward its shareholders.
Despite the challenges, TCS remains optimistic about its growth prospects. The company plans to overcome its challenges with operational excellence and digital capabilities. It is investing in talent development, hiring, and reskilling initiatives to overcome supply-side constraints and ramp up its large deals. With a strong deal pipeline, diversified portfolio, innovation-led offerings, and a client-centric approach, TCS is well-positioned for the future.
This post TCS Q2 Results Beat Estimates But Revenue Growth Disappoints: What Went Wrong? was originally published at Finance Crave
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