TCS quarterly earnings disappoint despite volume growth; Japan, Latin America weigh

In a choppy market, hobbled by two big unknowns – Greece and China – investors fishing for good news had expected the quarterly numbers of Tata Consultancy Services (TCS) to set a positive tone. After a lacklustre show in the previous two quarters, traders and shareholders were hoping for a robust top line growth. But on Thursday, they were disappointed – and chances are this could dampen market sentiment on Friday.

The country's largest software exporter reported lower than expected sequential revenue growth in the June 2015 quarter. This would make it tougher for TCS to deliver higher growth in the remaining three quarters and beat the average industry growth. Thus, investors may have to snoop around for other positive triggers. Revenue increased 3.5 per cent to $4,036 million from the previous quarter, much less than the expected 4-5 per cent growth. The slower growth was a bit of an aberration given that the company's volume – measured in terms of the billed work hours during the quarter – rose by a healthy 4.8 per cent sequentially against 1.4 per cent rise in the previous three months.

TCS, it appears, had to pay for being a price warrior in some of the markets. N Chandrasekaran, CEO and MD of TCS, told reporters that the drop in revenue, despite a better volume growth, was due to a fall of 130 basis points in sales realisations in Japan and Latin America, and depressed performance by its Diligenta unit in the UK.

It would now be more challenging for the company to beat Nasscom's industry growth forecast of 12-14 per cent for 2015-16. To achieve this, TCS would have to grow revenue by at least 5 per cent sequentially in each of the three remaining quarters. But this is easier said than done as TCS has been unable to report more than 4 per cent sequential growth during the lean quarters of December and March in any of the past three fiscals.

Another concern is the rising employee attrition which reached a record 15.9 per cent in the June 2015 quarter. Attrition typically goes up in the June quarter when software engineers leave to pursue higher education and greener pastures. The company expects the rate to come down in the coming quarters.

Despite higher wages operating margin (or, EBIT margin) of TCS fell by just 90 basis points against an expected 140-180 basis points fall. This was due to favourable currency movement and higher operating efficiency in the North American market. Its margin was 26.3 per cent in the June quarter compared with 27.2 per cent a quarter ago.