Press "Enter" to skip to content

TCS Q2 takeaways: Strong deal momentum may support rich valuations – Economic Times

MUMBAI: Blockbuster earnings are becoming the norm for Tata Consultancy Services (), as the company reported another quarter of above-expectation earnings.

The country’s largest IT services company saw its consolidated net profit expand 6.8 per cent sequentially to Rs 9,624 crore in the September quarter even as revenues grew at a healthy tick of 3.2 per cent.

“Our industry-leading profitability and strong cash conversion give us the wherewithal to make the right investments needed to build out the business of the future,” said Samir Seksaria, Chief Financial Officer at TCS.

That said, here are the key takeaways from the company’s Q2 earnings announced earlier today:

Deal wins may support valuations

TCS clocked $7.6 billion in new deals wins in the quarter, which suggested that it will be able to meet the annual deal wins of over $30 billion seen in the last financial year. The strength of the deal wins will likely assuage investors, who recently have been skeptical of the rich valuations of the stock.

TCS is currently trading at over 32 times one-year forward earnings and is up 39 per cent over the past year. “Demand pipeline continues to stay very strong,” CEO and MD Rajesh Gopinathan said in a post-earnings press meet.

Margin leadership remains

The IT services giant managed to expand its consolidated operating margin for the quarter by 10 basis points sequentially to 25.6 per cent despite the current challenges around attrition and currency headwinds.

While the operating margin is still below the aspirational band of 26-28 per cent that the company has set for itself, the ability of the company to withstand margin pressure in the current environment will further bolster investor optimism.

Europe to compliment US BFSI soon

Chief Operating Officer N Ganapathy Subramaniam said he expects the financial services vertical in Europe to start delivering stronger numbers after a few quarters. If so, the region could support the strong growth TCS is witnessing in the North America market. The North American market registered growth of over 17 per cent year-on-year led by broad based growth in BFSI, retail and manufacturing.

Attrition to remain a pain point

While TCS’ attrition rate is still among the lowest in the sector at 11.9 per cent, it is still inching higher as the company is affected by the ongoing challenges around talent retention. TCS said that challenges around attrition will remain for the next two-three quarters but it is trying to offset that by ramping up hiring and accelerating the rate at which new joinees are shifted from training rooms to the projects.