TCS Q3 takeaways: Strong margin show; CEO sees double-digit growth ahead

MUMBAI: India’s largest information technology services firm Tata Consultancy Services Ltd reported its best December quarter revenue growth in constant currency terms in nine years and a five-year high consolidated operating margin.

While the company’s earnings beat analysts’ expectations on most counts, it did not surprise the Street that the company announced a strong earnings performance despite the December quarter, traditionally, being the weakest for IT companies.

Analysts believe that the performance of the company will continue to get better in the coming quarters as they benefit from a long-cycle of technology spending in overseas markets and pick-up in spending from banks in the US and Europe markets.

The company announced another interim dividend of Rs 6 per share.

Here are the major talking points from the IT giant’s Q3 earnings:

Impressive operating performance

The company reported a better-than-expected consolidated operating margin of 26.6 per cent, higher by 40 basis points from the previous quarter. Analysts had feared a margin decline sequentially in the quarter.

The performance is impressive given that the company absorbed wage hikes across the verticals in this quarter. The margin is now closer to TCS’ long-term ‘aspirational’ aim of 27-28 per cent.

Blazing topline

The company saw its consolidated revenue grow 4.1 per cent on quarter in Q3, which is the highest December quarter revenue growth in nine years. The company, more impressively, has now seen its year-on-year turn positive in Q3, a quarter ahead of TCS’ own expectations.

CEO’s rosy outlook

“We are entering the new year on an optimistic note. Our market position is stronger than ever before, and our confidence is reinforced by the continued strength in our order book and deal pipeline,” said chief executive officer and managing director Rajesh Gopinathan.

Gopinathan also said that the company is confident of recording its “aspirational” double-digit revenue growth in the calendar year 2021 and the financial year 2021-22.

Broad-based growth

All revenue verticals of the company showed growth in an eye-popping quarterly performance by the company. The banking, financial services and insurance vertical grew at 2 per cent on quarter, manufacturing rose 7.1 per cent and retail surged 3.1 per cent. Among geographies, North America, India, the UK and continental Europe led the topline growth for the company.

Strong deal wins continue

TCS reported a total contract value of $6.8 billion in the December quarter, adding to the $8.6 billion in deal wins seen in the previous quarter.

Talent retention remains firm

TCS continued to remain the industry benchmark in terms of attrition rate, which stood at 7.6 per cent a record low for the company. TCS’ total headcount stood at 469,261 as of December 31.

“Our sustained investment in organic talent development is now paying rich dividends, helping us support our business growth,” said Milind Lakkad, chief human resources officer.

Is there any dividend for shareholders?

The company approved an interim dividend of Rs 6 per share.

What analysts said?

The stock will react positively on Monday after this performance and there could be around 3-4 per cent upgrade to earnings per share estimates of the company, said Rusmik Oza, senior vice president (head of fundamental research) at Kotak Securities.

“We are building double-digit revenue growth for next financial year on the back of the two large deals with Deutsche Bank and Prudential by the company,” Oza said.

Rich valuations

Shares of TCS are currently the most richly valued on the Street. The stock is currently valued at 31 times 2020-21 earnings and 27 times 2021-22 earnings, a significant premium to peers like Infosys that is valued at 26 times one-year forward earnings, according to FactSet.

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