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TCS second-quarter profit rises 23% as digital services revenue jumps

Digital business, accounting for 28% of TCS's overall revenue, surges 60%

Tata Consultancy Services' strong performance in digital business underscores the shifting focus of clients’ spending on new consumer-facing technologies such as cloud computing and artificial intelligence.   © Getty Images

MUMBAI (NewsRise) -- Tata Consultancy Services, India's largest software exporter, reported a 23% jump in second-quarter net profit, as a slump in the rupee and a surge in revenue from digital technology business helped expand margins.

The Tata Group flagship said consolidated net profit in the quarter ended in September stood at 79.01 billion rupees ($1.1 billion), compared with 64.46 billion rupees a year earlier. Revenue grew about 21% to 368.54 billion rupees. Analysts were expecting the company to report a net income of 79.02 billion rupees, according to Refinitiv data.

The "revenue growth was driven by expanding demand for digital transformation across verticals, and continued acceleration in banking and financial services and retail" sectors, TCS Chief Executive Rajesh Gopinathan said in a statement.

Digital revenue, which accounts for 28% of TCS's overall revenue, grew 60% in constant currency in the quarter. Revenue from the banking and financial services that account for a third of its sales grew 6.1%, while the retail and consumer goods sector saw an almost 16% jump.

The company's strong performance in digital business underscores the shifting focus of clients' spending on new consumer-facing technologies such as cloud computing and artificial intelligence. Mumbai-based TCS is one of the few Indian software exporters to grab a substantial share of the clients' investments in the new areas of technology outsourcing. In the second half of the last fiscal year ended in March, TCS won contracts worth billions of dollars.

Many smaller rivals are grappling with a growth slowdown as they continue to rely on rudimentary services such as maintaining their clients' software infrastructure and running back-office centers to earn a bulk of their revenue.

Gopinathan reiterated TCS' outlook, saying "we are confident that we will end the year with double-digit growth."

To be sure, Gopinathan's optimism contrasts with larger rival Accenture, which last month gave a weaker-than-expected growth forecast citing the macroeconomic challenges. Information technology industry is heading towards a challenging economic climate caused by Britain's imminent exit from the European Union and a searing global trade war.

"In the short term, there are uncertainties ... there is the overhang of Brexit and trade war," Gopinathan told reporters at a news conference in Mumbai. "But how that plays into the clients' technology budget, we'll know that in the course of next few months."

The company's operating margins in the quarter surged 144 basis points to 26.5%. The margins were aided by a 4.5% average sequential decline in the value of the rupee against the U.S. dollar.

Over the past few months, the rupee has been consistently weakening, hurt by rising crude oil price and a sell-off in emerging markets. A weaker rupee makes Indian outsourcing companies more competitive and boosts the value of their revenue earned in dollars.

A 1% fall in the value of the rupee against the dollar is likely to lead to a 1% to 1.5% improvement in earnings of software exporters, say analysts.

Second-ranked Infosys is set to report its second-quarter earnings on Tuesday.

Ahead of the results, TCS shares lost 3.1% in Mumbai trading, while the benchmark S&P BSE Sensex closed 2.2% lower.

--Dhanya Ann Thoppil

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