TCS: Hyper demand tapering up but spend on digitalisation continues

Experts think that growth rates seen amid the pandemic are stabilising

The second-quarter performance of Tata Consultancy Services (TCS) brings home many pointers for the Indian IT industry. Key takeaways from TCS results are mostly in growth prospects and supply-side aspects.

The Tata Group company, which announced its Q2 results last Friday, missed revenue street estimates in USD terms. However, sequential growth of 4 per cent in constant currency terms was in line with street projections.

TCS reported a 4 per cent quarter-on-quarter rise in revenues on constant currency terms, while it was 2.9 per cent in the US dollar term. Experts and brokerage firms are of the opinion that growth rates seen due to the rising digitalisation of enterprises amid the pandemic seem to be stabilizing. So, most Indian IT firms will see a double-digit revenue growth rate inching towards high teens in FY22 but maintaining such a growth rate in FY23 and beyond will be a challenge.

“(Outsourcing) market is stabilizing. Multi-year growth prospects are there but the scope for acceleration from the present level seems low. So, double-digit growth in the top line is likely but this will be in low double-digit,” said Pareekh Jain, an IT outsourcing advisor and Founder of Pareekh Consulting. “The demand environment remains good with most enterprises investing in digitalisation drive. This is being reflected in a robust deal pipeline despite the near absence of large deals,” he added.

Analysts are of the opinion that the absence of many large deals despite a robust deal pipeline of TCS indicates that large transformational deals may be less in numbers going ahead. Rather, the deal pipeline of most large and mid-tier companies is likely to be a mix of many small and mid-sized contracts.

For the just-ended September quarter, TCS’ deal wins stood at $7.6 billion, which was down 6 per cent compared to the June quarter. This is the second
consecutive quarter when the company saw a healthy mix of deals across sizes than drawing most total contract value (TCV) from a handful of large deals.

“Steadiness in deal wins, despite the absence of mega deals, is encouraging for the company as well as the sector,” Motilal Oswal Research wrote in a note.

Broad-based growth coming back

TCS Q2 results also give a fair amount of idea that sectors across the globe are coming back to normalcy in terms of IT spending barring a few.

In the September quarter, growth was broad-based led by technology and services with a growth of 5.3 per cent on a sequential basis, while communications and media saw revenue growth of 4.5 per cent.

The retail vertical grew by 4.3 per cent and manufacturing saw a growth of 4 per cent on a sequential term. All-important BFSI vertical saw revenue growth of 2.6 per cent with a revenue share of around 32.4 per cent.

Growth in life sciences and healthcare slowed down to 0.9 per cent on a sequential basis after four quarters of high growth. This reflects that as countries open up, IT spend on the life sciences sector is slowly stabilizing.

Similarly, TCS reported sound growth numbers across geographies including North America, UK & Continental Europe. Especially, the recovery in India business with 14 per cent sequential growth by TCS brings good news for all service providers with sound exposure to the country.

The Mumbai-headquartered firm had seen a negative sequential growth of 14 per cent in the June quarter, dragging down its growth numbers in Q1 of FY22.

Supply constraints to persist

Rising attrition numbers of TCS is indicative of the talent war in the Indian IT industry. The Tata Group company, which usually has the lowest employee attrition rates among its peers, saw attrition inching up by 330 basis points to 11.9 per cent in Q2 of FY22.

“Supply-side issues are likely to continue for a few more quarters for all service providers. That’s why we are seeing an aggressive addition of freshers to meet those challenges. Given the wage hikes and other measures to retain talent, impact on operating margin is also likely for most players,” said Jain of Pareekh Consulting.

TCS had already added 43,000 freshers in the first six months of the fiscal, its highest in the period so far, and would hire another 35,000 freshers in the rest of this year.

For the second quarter ended September, the Mumbai-headquartered firm had added a total of 19,690 employees, taking its total workforce strength to 528,748.

While TCS’ performance can be indicative of what is in store for investors in terms of other companies’ performance, many company-specific issues will also come to the fore in those results. This is because TCS is entirely in a different league with an annual revenue run rate of around $25 billion now. On such a large base, growth metrics can be influenced by several other factors as compared to its peers.

Nevertheless, TCS performance showed that the IT industry would continue its dream run in the medium-term owing to robust demand environment, albeit at a slower pace.

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