Tata Consultancy Services (TCS), the country’s largest IT company, has reported a record quarter. The IT giant has announced its earnings for the second quarter of FY2023, ending September 30 (July-August-September). For the first time ever, the Mumbai-headquartered company’s net profit surpassed Rs 100 billion. Chief executive officer Rajesh Gopinathan termed the quarter as a “milestone quarter” for the company. Investors and analysts have been keenly watching TCS for signals on the demand outlook for the sector, which is staring at the possibility of a recession in the US and Europe from where it gets bulk of its revenue. Here are the key highlights from TCS’ Q2 performance and also its guidance for the coming months.
TCS revenue up 18%, order book stood at $8.1 billion
TCS reported revenue of Rs 55,309 crore, up 18% year on year slightly above estimates of 17.5% growth for the quarter. The company’s net profit jumped 8.4% growth to Rs 10,431 crore over last year. In constant currency terms, the IT major’s revenue grew 15.4% YoY. The TCS’ order book for July-September stood at $8.1 billion. TCS said its operating margin contracted by 1.6% YoY to 24%.
Growth is spread across verticals
Segment-wise, growth was led by retail and CPG (22.9%), communications & media (18.7%), and technology & services (15.9%). Among major markets, North America led with 17.6% growth. Continental Europe grew 14.1% and the UK grew 14.8%. In emerging markets, India grew 16.7%, Latin America 19.0%, Middle East & Africa 8.2% and Asia-Pacific 7%.
Impact of economic uncertainty to show in next 3-6 months; for now order book holding up well
The sector will witness the impact of macro concerns’ on client budgets in 3-6 months while the concerns have not materialised in our order pipeline, Gopinathan added. “Difficult to say if we will be totally insulated but our intent is to stay close to customers, carve out a niche for ourselves and minimise any impact,” he added. “Demand for our services continues to be very strong. We registered strong, profitable growth across all our industry verticals and in all our major markets. Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements,”
Samir Seksaria, chief financial officer, said: “We are steadily making our way towards achieving our operating margin priority for the year, aided by leverage from good growth, the flattening of the workforce pyramid, steadily improving productivity and currency support. Very importantly, the headwinds from the supply-side challenges are abating, so that sets us up well for the seasonally weak second half of the year.”
Hiring down considerably
The employee additions at the company slowed down considerably in the last quarter. In Q2, TCS added just 9,840 employees, which is the lowest in many quarters. The net quarterly addition has been in five digits in the last five quarters. TCS is one of India’s largest private employers.
Attrition rate crossed 20%
Attrition rate at TCS breached the 20%, increasing to 21.5% from 19.7% in the previous quarter. However, the company said that the attrition has peaked and will be on a downtrend from hereon. It added that it expected attrition to “taper down from this point, while compensation expectations of experienced professionals moderate.”
Moonlighting against TCS’ core values and culture
“Moonlighting we believe is an ethical issue and it is against our core values and culture,” Milind Lakkad, global head HR, TCS, said. He said that TCS has a long term commitment towards its employees and the employees also have a “reciprocal commitment” towards the company, and also acknowledged that at present its peers in the IT industry may have different views on the subject. The company’s chief executive officer and managing director Rajesh Gopinathan said that an employee is barred from working for any other organisation as part of the service contract.
100% variable pay for 70% of TCS employees
Tata Consultancy Services will award 100% variable pay to 70% of its employees. “We are going to pay 100% variable pay for 70% of employees… the remaining 30% will get paid based on their business unit performance. This is for Q2 (July-September),” said Milind Lakkad. The IT giant said that a third of its workforce of 6,16,171 people have returned to office twice a week.
Plans to hire 45,000-47,000 freshers this fiscal year
The company also said that it has brought onboard 20,000 freshers this quarter, and “honoured” all the offers made amid a larger industry trend of delaying fresher joining due to a weak demand environment. TCS made a net addition of 9,840 people this quarter and onboarded close to 20,000 freshers. It had said it plans to onboard 45,000-47,000 freshers in the current fiscal year out of which it has already hired 35,000 so far. Last fiscal, the company had reported around 26,000 net employee additions per quarter, however, the management noted that lower hiring is a sign of its mature talent supply model.
Declares second dividend
The company has declared an interim dividend of Rs 8. This is the second interim dividend announced by the company.
Applied for 170 patents during the quarter
As on September 30, the company had applied for 6,922 patents, including 170 applied during the quarter, and been granted 2,560 patents.
TCS CEO on demand environment
Talking about the demand environment amid macroeconomic concerns in key geographies, chief executive Rajesh Gopinathan said that customers are spending on growth, transformation and business resilience offerings. “We see demand momentum across all our operating markets… (but) the environment is challenging and it requires all of us to remain vigilant. We have demonstrated that our focus on distributed portfolio of services and ability to remain relevant to customers — update quote,” said Gopinathan.
Wipro and Infosys under spotlight
All eyes are now on the earnings of Wipro and Infosys. Wipro is scheduled to release earnings on October 12, and Infosys on October 13.