Absolutely not: TCS CEO Rajesh Gopinathan on whether single-digit growth will be the new normal

Tata Consultancy Services (TCS) chief executive and MD Rajesh Gopinathan asserted that single-digit growth will not become the new normal as he believes the macroeconomic issues in Europe and US are transient in nature that will get resolved.

Gopinathan was confident about double-digit growth will return to the industry, even as analysts have predicted a great reset for the IT sector after a period of aggressive pandemic growth and hiring.

In an interview with Moneycontrolafter the company’s third-quarter earnings, he was upbeat about growth from a medium to long-term perspective.

On whether things will get worse before it gets better, Gopinathan said, “I think the answer to that is no, it’s likely to stay where it is. And then probably get better is our expectation. The current hesitancy will continue for some time and from there it will improve.”

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“The US especially, the whole macroeconomic situation is likely to be for a shorter period. And by the time we are a few months or a quarter two into the next year, we should see a much-improved outlook and return to more normal growth rates there.”

On whether TCS will outpace global IT spend, he said, “Absolutely. It is not just vendor consolidation, it is higher market share in incremental spend. On both sides, I believe we are very well positioned. So, we think that we will participate and gain share on both sides on the incremental spend, and on the existing spend.”

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In terms of growth rate, while TCS is expected to end FY23 with a growth rate of over 13%, analysts at Kotak expect a moderation in growth in FY24 to 8.1% amid an increasingly slowing demand environment.

On whether 8 percent will be the new normal or if the company will return to double-digit growth, Gopinathan said, “If you think about where that negativity is coming from, one, it is coming from a geopolitical situation, which is unlikely to be the new normal in Europe. If you look at it from the US perspective, the transition between cheap money and costly money, the transition is what is creating the current volatility, it is not that it is not one or the other”

“So, this year, the immediate negativity that is coming, are both of transient nature. How long will that transiency last? And that is, you know, we have a perspective that in US, it will be much shorter and in Europe, it is likely to weaken similar to what where the market is. But this is not the new normal”, he said that he is confident that growth will return to double digits.

He added that what is underlying the confidence is that the technology cycle has moved decisively towards a new, cloud-based architecture, which still has huge headroom for growth. He further said that there is a plethora of new things which gives even more credence that business models will become even more technology dependent, and even more deeply embedded in technology.

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“So medium to long term. Absolutely, we see a very positive outcome. US will resolve itself automatically during the course of the year. The European side of it, hopefully will get resolved this year”, he said.

TCS’ earnings for the third quarter ended December were broadly in-line, with constant currency revenue growth of 2.2% quarter on quarter and EBIT margins of 24.5%. However, deal wins were weak at $7.8 billion vs $8.1 billion in the previous quarter and the headcount fell sequentially by over 2,000. While the management was confident about demand in North America and the UK, Europe outlook remained uncertain.