Shares of Indias TCS Skid on Demand Recovery Worries After Q2 Revenue Miss

The second-quarter on-demand earnings from TCS, the world’s third-largest IT services provider, have sparked worries that technology spending may not recover quickly. The results missed analysts’ estimates, who, on average, had expected a 0.7% sequential growth in consolidated revenues for the quarter ending June 30 to $59.6 billion. According to an analyst, the company’s operating margin contracted by 130-150 basis points, impacted by wage hikes, visa costs, and large deal ramp-ups.

In the second quarter, TCS posted a 2% year-on-year rise in consolidated net profit to Rs 11,342 crore, missing Bloomberg forecasts of Rs 8,400 crore. The company’s EBITDA, or earnings before interest and tax, was flat at 24.5%, as higher onsite sticky costs canceled out benefits from a cost pyramid optimization and better utilization. The company’s BFSI segment, which includes clients like Goldman Sachs and JPMorgan Chase, saw revenue decline by 1.8% sequentially.

On the earnings call, TCS Chief Executive Officer K Krishnakumar told investors the company had not seen any significant budget cuts. Still, clients are now adopting a “spending wisely” strategy amid the broader macroeconomic uncertainty depressing demand. He also added that the company has yet to see any evidence of a revival in demand, which could delay the realization of revenue.

However, TCS has said it still expects to grow revenue at a 4% annual pace in the current fiscal year, which ends next March. Its guidance for the entire year also reflects that the company has yet to see any significant pick-up in demand and that client spending will likely remain subdued for a while.

The poor results and commentary took the shine off TCS’s $2 billion share buyback announcement, which it made on Wednesday. The company will buy back up to 4 million shares, equivalent to 2.3% of its total outstanding share capital, for Rs 3,317. The offer will close on July 31. Under the proposal, every retail investor will be eligible to tender one share for every seven TCS shares. Non-retail shareholders will be eligible to tender up to 108 shares for each Rs 2 lakh worth of shares held.

TCS’s new CEO, K Krithivasan, will also address investors on the earnings call, and Dalal Street will be keen to hear the company’s business strategy under its new management. The company has also reported a record-breaking deal win of $11.2 billion in the second quarter. The company also reported a 25% rise in its free cash flow to Rs 10,846 crore. The figure surpassed the earlier Rs 9,215 crore set by TCS in the first quarter of this financial year. The company’scompany’s net debt stood at Rs 62,745 crore on June 30. ICICI Direct estimates that TCS’s net profit for the quarter will be Rs 15,968.6 crore, up by 15.3% YoY and 2.7% QoQ.

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