TCS Reveals Drop In Operating Margin, Profits

Tata Consultancy Services kicked off the Indian IT earnings season with tepid results that will likely discourage both investors and job seekers.

There was a sharp drop in operating margin and a 7% fall in quarterly profit on a sequential basis -- its lowest profit in seven quarters, hurt by currency volatility and a spike in wage costs.

Net profit dropped to $923 million for the first quarter ended June 30, from $992 million. When compared to a year earlier, it dropped 1.8%. Margin plunged 230 basis points (100 bps = 1 percentage point) to 23.4%, from 25.7%. The rise of the rupee against the dollar -about 5% this year -shaved off around Rs 650 crore in revenue from India's biggest software services company.

"Profitability was impacted by seasonal and external factors," CEO Rajesh Gopinathan said at a news conference. "It was an impact of 150 basis points due to currency fluctuation and another 80 basis points, or Rs 450 crore, due to salary hikes," he added.

Revenue rose to $4.6 billion, 2% up sequentially in constant currency , and 3.1% up sequentially on a reported basis. Compared to the same quarter a year ago, revenue is up 5.2%. Nasscom expects the industry to grow by 7-8% this fiscal. So TCS would need to accelerate in the coming quarters to be able to hit those numbers.

A report by Batlivala & Karani (B&K) Securities said, "Though US dollar revenue growth has been marginally better than our estimates, operating performance was much below our expectations. We believe it will be an uphill task for TCS to achieve its lower end of ebit (earnings before interest and taxes) margin guided band for FY18."