Q1 takeaways: TCS sticks to double-digit growth hope despite muted show

The company’s management highlighted the several challenges faced by its staff due to the medical crisis in the country in April and May, which saw daily new cases rise by over 400,000 a day at one point during a brutal summer.

The company’s constant currency sales growth for the quarter stood at merely 2.5 per cent quarter-on-quarter, substantially lower than the 4-4.5 per cent projections made by analysts. Further, operating margin slipped below the ambitious range of 26-28 per cent as wage hikes weighed.

Here are the major takeaways from the company’s first quarterly earnings of the financial year:

Double-digit growth on track

Despite the sequential decline in performance, Managing Director and Chief Executive Officer Rajesh Gopinathan said the company’s growth trajectory has not been compromised during the quarter. Gopinathan said the overall expectation of double-digit topline growth in 2021-22 remains on track, as core markets and verticals have remained strong during the quarter.

Deal momentum not slowing

Much of the heavy lifting to achieve double-digit growth this financial year will have to be done by continued deal wins, Gopinathan said suggested that the deal pipeline remains robust. won orders worth over $8 billion for the quarter, which was sequentially lower, but still very healthy. The CEO especially highlighted optimism for the deal pipeline in Europe, where the company is inching closer to some fresh closures.

India ops may rebound strongly

One of the major factors that contributed to the lower-than-expected topline growth during the quarter was a sharp deterioration in India business due to the pandemic. Sales in India nosedived 14 per cent sequentially due to the impact of the second wave. TCS said it lost business worth over Rs 300 crore in India during the quarter. As the Covid cases declines and the economy reopens, Gopinathan sees cause for a strong rebound in the domestic business for the company.

Margins pressure real, but not a worry

The company’s consolidated operating margin shrank 130 basis points sequentially, largely because of wage hikes undertaken during the quarter. The company’s newly appointed Chief Financial Officer Samir Seksaria said the company should be able to sustain its margins within the aspired range of 26-28 per cent despite obvious pressures on the wage front. “Resilient margins despite wage hikes in 1Q, although a tad lower than expectations but still healthy keeping in mind strong hiring trends,” brokerage firm Morgan Stanley said in a note.

Attrition rises but not worryingly

As has been the case with most other IT companies, attrition rate at TCS jumped 140 basis points sequentially to 8.6 per cent in the June quarter as the talent war continues in the sector. The company said attrition was likely to keep rising going ahead, but it has baked that into its operating model. More importantly, TCS said the rise in attrition is unlikely to have a significant impact on margins.