The country’s largest IT company, Tata Consultancy Services (TCS) on Monday said it was seeing some softness in long-term deal decision making after the Mumbai-based IT exporter reported a bigger-than-expected rise in second-quarter profit on Monday.
The Mumbai-based company's order book for July-September stood at $8.1 billion, consisting of several small- and medium-sized deals rather than large ones, TCS said.
Its revenue from operations rose 18 per cent to Rs 55,309 crore. In dollar terms, TCS reported revenue of $6.87 billion, up 4 per cent sequentially in constant currency (CC) terms.
TCS’ operating profit margin improved 90 basis points sequentially to 24 per cent despite supply pressures. Lower employee expenses, operating leverage, and lower subcontractor expenses aided margins in second quarter of current fiscal, brokerage firm Motilal Oswal noted.
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TCS’ last twelve month (LTM) attrition jumped 180 basis points to 21.5 per cent. The management has indicated that quarterly annualized attrition should moderate starting third quarter.
Management commentary on the demand environment and deal pipeline remained intact with no visible impact of weakening macro environment; however, the management has indicated risks to deal pipeline and conversion in Europe due to uncertainty around energy prices. TCS is seeing some caution for longer term deals and is experiencing some delayed decision making in Europe, but it continues to see a strong spending environment in the US. While the optimistic commentary was on expected lines, we remain concerned on the near-term growth due to macro slowdown, Motilal Oswal added.
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Many of top IT services firms are looking at various cost-cutting measures, as they are worried that tightening budgets at recession-wary US and European clients will sharply hit their own profits after a pandemic-led boom.
"Europe is a very uncertain environment," Chief Executive Rajesh Gopinathan told a press conference.
"(We) have to wait and see how the winter pans out ...if there are production cuts that will roll across multiple industries," he said.
The company said its order book in the United Kingdom and Europe were stronger sequentially in the second quarter, but warned there could be some "softness" in deal closures in Europe amid rising inflation as supply chains remain disrupted due to the ongoing Russian invasion of Ukraine.
The company's net profit rose 8.4 per cent to Rs 10,431 crore in the second quarter of current financial year from a year earlier.
We are factoring in annual dollar revenue growth of 7.5 per cent in FY23, owing to the macro headwinds in the second half of the year along with elevated cross-currency headwinds, Mumbai-based brokerage firm said.
The margin (up 90bp QoQ) was better than expected on account of lower employee costs, sub-contractor expenses, and operating leverage. The management indicated that attrition has peaked out and quarterly attrition should ease in the coming quarters. The supply situation easing out in 2HFY23 along with benefits from increased fresher additions in the last few quarters and lower sub-contractor costs should aid margins, analysts said.
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Motilal Oswal has slightly tweaked its FY23/FY24 EPS. It expects dollar revenue growth of 8.1 per cent over FY22-24. It has buy rating on the stock for target price of Rs 3,580, implying 15 per cent upside from its previous closing price of Rs 3,121.
