Underlining that the business environment is not as seasonal as it used to be, a top official of Tata Consulting Services reiterated that the country’s top IT company would continue to focus on posting a double digit growth in the financial year despite a muted first half.
“We were confident when we started the year,” Chief Financial Officer V Ramakrishnan told Moneycontrol about the company’s outlook for a double digit growth in FY20. “It is a challenge now…(but) we continue to be focused on that goal. It is not that we have given up,” said Ramakrishnan.
The reiteration is significant as market pundits raised doubts about TCS meeting its growth target after missing estimates in the second quarter.
The company reported 1 percent sequential decline in the September quarter profit at Rs 8,042 crore, missing expectations. The major concern was a slow down in constant currency revenue growth at 8.4 percent (YoY) in Q2FY20, after reporting double digit growth in previous four quarters.
This means that TCS would now have to have a better second half to get into a double-digit growth track. Traditionally, the third and fourth quarters have been “seasonally” slower.
But, that may not be the case anymore.
“We have been observing in the last five to six quarters, that seasonality is going off. There is no seasonally good quarter,” said Ramakrishnan and added that the trends were more broad based, across markets and across sectors.
At the same time, he added that some sectors, such as retail, may do well in December
“But seasonality by and large is a little different from a few years ago, when it was more pronounced,” added the senior executive.
Adding credence to the rational is the strong showing of the company in the third quarter of the last financial year, when it had managed a double-digit growth in revenues.
Retail push
One of the sectors that was expected to push TCS' growth in the second quarter was retail, especially to balance out the sluggishness in the BFSI segment, the company’s largest.
But, that did not happen.
The BFSI segment registered a 8 percent growth (YoY) in constant currency against 9.2 percent in previous quarter (but higher against 6.1 percent in Q2FY19) while the retail & CPG sector growth was 4.8 percent against 8.4 percent QoQ and 15.6 percent in Q2FY19.
“Retail is a surprise for us. We did expect retail to start picking up,” accepted Ramakrishnan. “But, some of the deals that were expected were pushed a little. There are retail businesses that are deeply challenged and some are going out of business,” he added.
That is why the upcoming holiday season is critical for the retail sector, with focus on more transactions, processing, pricing and customer promotion. “Last year, the brick and mortar companies did as much business as the online companies during the holiday season,” said the CFO, hoping that there will be a repeat this year too.
North America market
A 35-year veteran in the field, Ramakrishnan also headed TCS North America’s finance function for over seven years. The market is the largest pie for the company.
Despite the slowdown impacting the market, the company continues to be relevant, added the CFO.
“We have a deep relationship with our clients in the market. Some of them go back 35 years. Whatever the macroeconomic environment, the key is to stay relevant to the customers and understand what their requirement is and see where technology can make a difference in this business environment,” he said.
While agreeing that the last two years have been “soft,” Ramakrishnan said that, even as the bigger banks had curtailed investments, the smaller ones increased theirs. TCS is actively participating in the segment, he said.
Hiring and margins
TCS added a net of 14,097 employees in the second quarter, the highest ever number of employees to be on-boarded in the three-month period.
Much of the hiring was done anticipating the business growth, which though was muted. At the same time, the company is building capability with a major push in campus hiring, and then training them according to the skill requirement.
This may play a critical role, given the order book which was the highest in six quarters. As the orders come online, the hiring will begin to play a significant role.
In the second quarter though, it may have squeezed the margins. Its margin contracted 250bps YoY to 24 percent, missing analyst estimates of 25 percent.
But, with hiring not required in the same pace in the coming quarters, the margins may get a much required breather in the second half of the year.
Also giving out hope is the deal pipeline. “The deal pipeline is strong and demand environment is there,” said Ramakrishnan.
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