Tata Consultancy Services (TCS) maintained its resilient performance in March Quarter 2024. The IT bell-weather reported stable revenue and profitability numbers and 12-quarter high operating margins. Revenues came in at Rs 61,237 crore in Q4FY24 compared to Rs 59,162 crore, same period previous year, a rise of 3.5% YoY.
Close peers Infosys and Wipro reported lackluster revenue growth numbers.
In dollar terms, revenue stood at $7,363 million up 2.3% YoY in March Quarter 2024. Revenue growth in constant currency (cc) was 2.2% YoY in Q4FY24.
Profit after tax or net profit came in at Rs 12,434 crore, a rise of 9% YoY in March Quarter 2024. Despite demand weakness, curtailment of discretionary spend by clients and macro uncertainty, TCS revenue numbers are stable and resilient supported by growth in UK and India markets in Q4FY24.
North America, UK and Continental European Markets together constituted 81% of revenue mix in Q4FY24.
Operating Margins At 12-Quarter High
The company beat street estimates reporting operating margin of 26%, expanding 150 basis points (bps) YoY and 100 bps sequentially in March Quarter 2024.
Speaking on robust operating margin expansion, Samir Seksaria, Chief Financial Officer at TCS said, “This was in spite of a 90 basis points increase due to higher third-party costs and travel expenses, offset by 190 basis points improvement from reduced subcontractor costs, improved productivity and better utilization.” Reduction of subcontractor costs aided margin expansion in FY24.
According to the management as subcontractor costs bottom-out, margin expansion will be supported by overall portfolio-based pricing improvement and contract renewals getting priced in at a higher price. “If the macro risk recedes and growth reverts back higher to its normal trajectory, then that can only help us accelerate this operating margin growth journey”, said Seksaria. While TCS operating margins improved 150 bps YoY, Infosys operating margins fell 100 bps YoY to 20% in Q4FY24. Wipro was better off with 39 bps margin expansion in March Quarter 2024.
Cautious About Near-Term Growth, TCV At All-Time High
Though revenue growth looks modest, the management is optimistic about the medium-long term growth prospects across all its business verticals. The BFSI vertical sees pent up demand, there are green shoots visible in consumer business and manufacturing is witnessing strong investments.
But when is growth reverting back to its normal trajectory? In the near term there are headwinds as customers curtail discretionary spend or pause projects which do not meet their return on investment (ROI) threshold. Thus, the management is cautious in predicting revenue in the near term. But in the medium to long term, TCS management is optimistic as the total contract value (TCV) continues to remain high. Total contract value (TCV) stood at an all time high of $13.2 billion in Q4FY24 indicating a resilient order book. The TCV for BFSI business was $4.1 billion in March Quarter 2024 compared to $2.6 billion in December Quarter 2023. Consumer group TCV is also up marginally to $1.6 billion in Q4FY24 from $1.5 billion in Q3FY24. North America TCV stood at $ 5.7 billion in Q4FY24 up from $4.2 billion in Q3FY24. In FY24 overall TCV was $42.7 billion, a record growth of 25.2% YoY.
There are primarily two drivers for strong deal wins, transformative work and cost & optimization programs. While cost and optimization programs are around vendor consolidation, operating model transformation and application rationalization, transformative work includes cloud adoption, enterprise cloud modernization, cybersecurity and Gen AI. According to the management, savings generated from cost and optimization programs are being used by customers to fund transformative work. Speaking on deal mix, Krithivasan said. “There is fair mix. I would say maybe 55 to 60% in terms of cost and optimization and the remaining in terms of transformative engagement.”
The US Fed kept its benchmark interest rates unchanged at 5.25% in March 2024 as consumer inflation witnessed a mild uptick. In case consumer inflation, which rose due to higher energy and food prices declines, stabilizes in the next few months, the US Fed will undertake its rate cutting exercise this year. As interest rates lower, companies might increase their technology spending and undertake their paused projects. The US Fed is waiting for inflation to fall below its 2% target. And so is the IT industry. June and September Quarters are the seasonally strong quarters. Hopefully geopolitical risks should not play spoilsport.
