Tata Consultancy Services hit a life high on Friday; its shares surged 7 per cent, even as the wider market was flattish, after the country's largest software services exporter returned to double-digit US dollar revenue growth for the first time in twelve quarters and sees growth returning in its key BFSI (banking, financial services and insurance) vertical in the current financial year.
The company's board recommending a bonus issue of equity shares in the ratio of one share for every one share held also boosted market mood. TCS shares finally ended at Rs 3,406.40, up 6.8 per cent, while the broader BSE Sensex ended 12 points or 0.03 per cent lower.
The company reported a better-than-expected 4.5 per cent year-on-year rise in fourth quarter consolidated net profit at Rs 6,904 crore, while revenue gained 8 per cent to Rs 32,075 crore. In US Dollar terms, the revenue was up 11.7 per cent at $4.97 billion on a net profit of $1.07 billion, up 8 per cent.
The results topped those of its rival, Infosys. The Bengaluru-based company had last week reported a quarterly net profit of Rs 3,690 crore, up 2.4 per cent, while revenue grew 5.6 per cent to Rs 18,083 crore. Even in US Dollar terms, Infosys lagged TCS, with a revenue of $2.80 billion (up 9.2 per cent), while net profit was at $571 million, up 5.3 per cent.
TCS, which has increased investments behind digital technologies in recent years, has been boosted by large deal wins, which the TCS MD and CEO Rajesh Gopinathan attributes to the company's ability to provide holistic solutions to its customers from the back-end to front-end.
Moreover, it sees a turnaround in its key BFSI vertical and a pickup in growth in North America, which should only add to the strong growth seen in markets like continental Europe and UK.
“North America continues to be an area we are focused on. Incrementally, we are more confident about BFS, North America than we have been in the recent past. Though the revenues have not started flowing in, early client discussions show that there is not much of stress left in the system and we hope that will translate into better spend through the course of this year,” said Gopinathan.
He also sees strong growth momentum coming back in the retail vertical in the current year ending March 2019.
The key positives for TCS include accelerating scale of digital business, strong traction in Europe, recovery in retail and consumer packaged goods ahead, supported by multi-practice deal wins and pipeline and strong free cashflow generation, said Apurva Prasad, analyst at HDFC Securities.
Other analysts too remain upbeat on the company, more so with the share of digital revenues continuing to rise.
“TCS mentioned the digital spends from clients is now maturing to integrated programmes (digital plus enterprise IT), a positive for TCS given its wide portfolio of capabilities,” said Pankaj Kapoor of JM Financial Institutional Securities.
However, concerns over margins remain. The company has given average wage hike of 2-6 per cent, effective April 1, with high performers getting a higher increment.
“TCS maintained the aspirational EBIT (earnings before interest, taxes) margin band of 26-28 per cent even as FY18 EBIT margin (24.8 per cent reported and 25.5 per cent on constant currency basis) was below the band. Transition costs in the large deals plus higher effective wage hike pose near-term challenges,” said Kapoor.
Prasad of HDFC Securities also expects wage hike to hurt margins by 200 basis points in the quarter ending June, which will keep the overall margins below the target band of 26-28 per cent.