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Informist, Thursday, Oct. 10, 2024

 

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--CEO: Cautious trends of last few qtrs played out in Jul-Sept
--CEO: BFSI showed recovery signs Jul-Sept amid global uncertainty
--Seeing some recovery in BFSI vertical in North America 
--Overall demand outlook remains cautious 
--Lower interest rates to boost consumer, industry confidence 
--Yet to see large transformation deal wins in BFSI vertical 
--Seeing some pressure in manufacturing vertical in near-term 
--To use generative AI for software development 
--Seeing demand for AI in service sectors 
--Investing significantly in top emerging markets to drive growth 
--Easing of inflation, improving macro trends to bode well for business 
--Discretionary IT spend same as before, some deals' duration went up 
--Cost-optimisation deals still make up large number of wins 
--Seeing good growth in banking in North America, Europe 
--Within BFSI, banking, capital market, insurance segments doing well 
--High 3rd party expenses on transformation projects weighed on margin 
--Deal pipeline looking strong, total contract value in comfort range 
--Generative AI pipeline remains strong 
--Saw softness in lifesciences, healthcare due to client issues 
--Tapering of third party expenses to aid margin, sales in next 3 qtrs 
--Oct-Dec furloughs to be similar to last year 
--Would like to get back to 26-28?IT margin as soon as possible 

 

MUMBAI – Even as Tata Consultancy Services Ltd. expects lower interest rates in major economies to bode well for its business, especially in the banking and financial services vertical, the company did not sound overly optimistic about a meaningful growth recovery in the near term. In a conference call with analysts, India's largest information technology company drew attention to the fact that global discretionary IT spending has not improved, and that large transformation deals remain elusive.  

 

"Discretionary IT spend is same as before, and in fact, the duration of some deals went up," Chief Executive Officer and Managing Director K. Krithivasan said in a conference call on Thursday after the IT behemoth released its September quarter earnings. Cost-optimisation deals still make up a high percentage of overall wins, and large transformational deals aren't happening in the BFSI vertical, he said. 

 

The company also expects some pressure in manufacturing and healthcare verticals in the near term, with a large lifescience sector client having reduced the scope of a contract earlier this year. There are certain issues in developed markets like the UK, but these would be resolved in the coming months, the company said. 

 

TCS refrained from giving a view on when its operating margins would recover to the aspirational target range of 26-28%, owing to the overall cautious demand environment, but guided for a gradual recovery in profitability as third-party expenses related to a client are set to decline. Chief Financial Officer Samir Seksaria said the company would like for margins to be back in the band "as soon as possible". The company had exited the last financial year ended Mar. 31 with a margin of over 26%. 

 

The company reported a lower-than-expected net profit for the September quarter, despite revenue growth being the highest in seven quarters. Higher revenue contribution from a low-margin deal with Bharat Sanchar Nigam Ltd., a decline in overall deal wins, and weakness in demand from some developed markets may have led to lower operating margins and profits for the company, according to analysts.

 

For Jul-Sept, India's largest information technology srvices company reported a consolidated net profit of INR 119.1 billion, down 1% on quarter. The IT behemoth's consolidated revenue for the September quarter rose 2.6% on quarter to INR 642.6 billion.

 

The deal with BSNL may have propped up the topline, but it is likely to have been a drag on the profitability of the company. TCS' earnings before interest and depreciation margin fell to 24.1% from 24.7% a quarter ago.

 

Tapering of third-party expenses related to BSNL will aid margin recovery in the next two-three quarters, the company said. Furloughs are seen similar to last year in Oct-Dec, it said.  

 

GREEN SHOOTS 

TCS expects lower interest rates to boost consumer and industry confidence, and thus bolster its business in the coming quarters. It is witnessing a recovery in the BFSI vertical in North America and Europe. "Within BFSI, banking, capital market, insurance segments are doing well," said Krithivasan. 

 

TCS' largest vertical, banking, financial services and insurance, saw segment sales rise 3% on quarter to 237.9 billion during Jul-Sept and the segment profit increased over 5%. Brokerage Sharekhan by BNP Paribas noted that the quarter-on-quarter sales growth for the BFSI vertical was 1.9% in constant currency terms. 

 

TCS' deal pipeline looks strong and total deal wins are in a comfort range, the senior management said. The company's total deal wins for the September quarter were at $8.6 billion, lower than $10 billion expected by some analysts. The deal wins were higher than $8.3 billion in Apr-Jun but lower than $11.2 billion in the same quarter of the previous financial year.

 

The company also remains optimistic about other segments such as retail and IT services. The pipeline for generative AI projects is also strong, and the company is using AI for software development as well. 

 

TCS will continue to invest significantly in top emerging markets to drive growth, as it sees these regions as fast-growing. On Thursday, the company's shares closed at INR 4,227.40 rupees on the National Stock Exchange, down nearly 1%.  End

 

US$1 = INR 83.96

 

Reported by Apoorva Choubey and Darshan Nakhwa 

Edited by Avishek Dutta

 

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