TCS: No problems, really?

TCS reported a 3.1 per cent sequential growth in revenue in constant currency terms, below market expectation of around 3.5 per cent growth. However, given improved performance in few verticals, including energy and travel and lower attrition rate, it was not a bad show.

Revenue growth in constant currency terms was better both sequentially and year-on-year (see table). The company added six clients in $20 million plus bucket and four clients in the $50 million plus bucket.

However, there were some pain points too. Though the company’s CEO N Chandrasekaran said that he sees no problem in any of the verticals or geographies, numbers show that problems are creeping up.

TCS’ volume growth in the June quarter was 3.4 per cent (sequential). Though higher from the 3.2 per cent in the March quarter, it was weaker than the volume growth in the June 2015 quarter of 4.8 per cent. This is an indication of trouble in some segments.

The BFSI vertical that accounts for over 40 per cent of the company’s revenues grew by a meagre 1.7 per cent in constant currency terms in the June quarter over the March quarter. This is down from 3.2 per cent sequential growth in the March quarter and 3.3 per cent in the same quarter last year. This is despite the fact that the company’s UK subsidiary – Diligenta (insurance BPO), recorded a growth after many quarters of decline in revenue.

Further, for the full year 2016-17, TCS hasn’t spelt out a strong outlook for the Diligenta business in UK or its businesses in Latin America and Japan. In fact, it expects Japan to de-grow for a few more quarters.

Since TCS’ EU operations contribute 26 per cent to its revenue (14.8 per cent from UK and 11.5 per cent from Continental Europe), the company’s growth could be at risk if UK exits the EU; UK’s banks and financial institutions are large clients of Indian IT services companies. Infosys’ Europe exposure is relatively lower at 23.4 per cent of revenue.

TCS’ digital business accounted for 15.9 per cent of revenue, not much different from the previous quarter. This raises concerns about the company stagnating vis-à-vis MNC peers in new age solutions.

In the June quarter, operating profit margins contracted 100 basis points sequentially to 25.1 per cent, the lowest in last several quarters. Though relative to market expectation of an over 120-130 basis points drop, the company’s performance was better, it is still worrisome.

Chandrasekaran has always indicated that the company wants to maintain margins in the band of 26-28 per cent. But, with the drop in the last quarter, there seems some problem maintaining margins.

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