India’s largest IT company, Tata Consultancy Services (TCS), reported better-than-expected results for the quarter ended December 2020 (Q3). In fact, it was the firms’ strongest third-quarter result in nine years. Despite the negative effects of the Covid-19 pandemic, TCS has been able to comfortably secure its market share in the IT industry. Let us dive into specific details regarding its performance for the October-December quarter. 

Important Q3 Figures

  • TCS reported a 7.18% year-on-year (YoY) increase in consolidated net profit to Rs 8,701 crore. The IT major had posted a profit of Rs 8,118 crore in Q3 of the previous financial year.
  • The company’s consolidated revenue increased by 5.42% YoY to Rs 42,015 crore in Q3 FY21. Its revenue stood at Rs 39,854 crore in the corresponding period in FY20.
Quarterly FinancialsQ3 FY21Q2 FY21Q3 FY20QoQ change(%)YoY change(%)
Revenue (Rs crore)42,01540,13539,8544.75.4
Net Profit (Rs crore)8,7017,4758,11816.47.18
Source: TCS’ Q3 Financial Report
  • Constant currency revenue growth stood at 4.1% QoQ (or 0.4% YoY). [Constant currency refers to a fixed exchange rate that eliminates fluctuations when calculating financial performance figures. Companies with significant operations in other countries often represent their earnings in constant currency terms, since floating exchange rates can often mask true performance]
  • In dollar terms, revenue increased 5.1% to $5,700.6 million during the same period. 
  • The operating margin (or EBIT margin) stood at 26.6%. This is the highest EBIT margin in the last 5 years, even after rolling out salary hikes. [Earnings Before Interest & Tax (EBIT) margin is the ratio of operating income to net sales]
  • TCS has also been able to secure the lowest-ever employee attrition rate in IT Services at (Last Twelve Months) 7.6%. [Attrition rate is measured as a percentage of employees that left a firm over a specific period]
Source: TCS’ Q3 Financial Report

Historically, it is seen that Q3 tends to be a seasonally weak quarter for IT companies. This is due to year-end holidays in the United States and Europe, which are key markets for these companies. However, TCS has completely beaten street estimates and has posted great results during the quarter. The company has also announced an interim dividend of Rs 6 per share. It has fixed January 16 as the record date to determine the eligible shareholders. The payment date of the dividend will be February 3.

Robust Growth and Expansion

Now, let us look at the segment-wise growth of the company in Q3. The revenue growth of TCS was led by the Manufacturing vertical, which grew 7.1%. The Banking, Financial Services, and Insurance (BFSI) vertical showed a sequential growth of 2%. This segment contributes 30% to the IT major’s revenue. Other verticals of TCS that showed improved growth include Life Sciences and Healthcare (+5.2%) and Communications & Media (+5.5%). The North American market, which contributes to half the company revenue, saw 3.3% QoQ growth. 

TCS continued to receive significant orders from prominent companies during the October-December period. Many of its clients embraced digital transformation because of disruptions caused by the Covid-19 pandemic. There was a greater demand for TCS’ cloud-based services as well. 

The company’s total deal wins for the quarter ended December were reported at an impressive $6.8 billion (~Rs 49,915 crore)! In November, TCS agreed to acquire the employees and select assets of Pramerica Systems from insurance giant Prudential Financial Inc. It had also announced the acquisition of Postbank Systems, the IT unit of Deutsche Bank AG- a deal that is estimated to be around $500-$1,000 million (~Rs 3,670 crore-Rs 7,341 crore). These massive deals would help the firm to expand in key European markets.

“Growing demand for core transformation services and strong revenue conversion from earlier deals have driven a powerful momentum that helped us overcome seasonal headwinds and post one of our best performances in a December quarter” – TCS CEO Rajesh Gopinathan.

Conclusion

The Covid-19 pandemic had a substantial effect on almost all IT companies during the first quarter of FY 2019-20. Some companies lost several clients, whereas many others faced a slowdown in sales revenues. Employees were forced to work from home, which initially led to an increase in costs. Despite all odds, the IT sector showed a very strong rebound over the next two quarters. This was primarily due to massive deal wins and clients spending more on cloud computing and artificial intelligence (AI). Technology companies have also been able to cut costs.

The Q3 results posted by Tata Consultancy Services has become a picture-perfect definition of a strong recovery. It has been able to show promising revenue growth across all segments and continues to receive significant orders. They have worked extensively to create better products to meet the demands of all types of clients. At a time when most firms are struggling to cope amidst the Covid-19 pandemic, TCS had even declared salary hikes for its employees in October! The company’s management is confident that TCS will post double-digit growth in the financial year ending March 2022. Interestingly, the stock price is now trading above Rs 3,200, while the recently concluded buyback’s price was around Rs 3,000. Let us look forward to seeing how the IT major plans to further establish its dominance across the globe.