Tata Consultancy Services, which reported its numbers for Q3FY23 on January 9, saw its Chief Executive Officer Rajesh Gopinathan remaining upbeat even amid a challenging demand scenario for the sector. This was particularly in the US and UK markets, from where the company derives a majority of its revenue from. However, he was cautious about the situation in Europe.
Gopinathan told reporters that in the medium term, they have very strong confidence in the US and UK, while Europe is difficult to call.
“US and UK account for about two-third of our business, so we are quite comfortable. In Europe, we have a very strong presence on the ground. We should be able to navigate it and on a relative basis we should be able to navigate Europe well compared to all other players. So we are confident about our ability to play Europe,” he said.
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He added that only time will tell if the problem in the US is real one, and that they currently believe it is transient.
“There is no structural problem in US and we are quite positive on the medium term. The immediate short term is difficult to call, we'll have to see, but US we are quite positive.,” he added.
TCS currently has the highest exposure to Europe and the UK among its peers, generating nearly 30 percent of its revenue from these markets, which have been weak due to macroeconomic challenges. But in Q3, the growth was led by the UK market along with North America.
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The total contract value (TCV) for the third quarter of FY23 for TCS was $7.8 billion. This was in line with management's guidance of a TCV run rate of $7-9 billion per quarter. Last quarter's order book was $8.1 billion, as compared to $7.6 billion at the same time last year.
“We are pleased with our strong growth in a seasonally weak quarter, driven by cloud services, market share gains through vendor consolidation, and continued momentum in North America and UK,” Gopinathan said in a statement.
He added that in the customer base they focus on, they have seen vendor consolidation where clients are preferring large vendors like TCS, and here the company has market share gains when it comes to the spend at a customer-level, he said.
On the nature of the demand, Gopinathan said he expects this year to be a more balanced year. “A lot more balanced in terms of cost optimization, cost-based transformation deals, and that varies by market,” he said.
Speaking on the types of deals he is bullish on, N Ganapathy Subramaniam, COO, TCS said, “Tech spending is holding up specifically in terms of large deals related to cloud transformation. We are seeing some weaknesses in mortgages and insurance. Consequently, banks might be planning some exposure reduction to these offerings. Capital markets/ trading side of it is looking good. In wealth and retirement space, people are looking at technology to bring in automation.”
Gopinathan added that a lot of work is also happening on cloud because a lot of investments have gone into it.
“From actual project work related to cloud, there's quite a lot of work yet to be done. We are very strongly participating in that. You can consider whether to call it digital transformation or not. But it is truly transformative. And that will continue through the year well into the year,” he said.
During the third quarter, Rail Delivery Group, TAP Air Portugal, Al Maryah Community Bank, and CTBC Bank, headquartered in Taiwan, were among the most significant deals won. TCS is yet to officially announce a possible deal with BSNL worth over $2 billion.
TCS' growth in major markets was led by North America and the UK, which increased 15.4 percent year-on-year in constant currency, followed by Continental Europe (9.7 percent). In emerging markets, India grew 9.1 percent, Latin America grew 14.6 percent, the Middle East and Africa grew 8.6 percent, and the Asia Pacific grew 9.5 percent.
Sector-wise, Retail and CPG (18.7 percent) led the growth followed by Life Sciences & Healthcare verticals (+14.4 percent). Communications & Media grew +13.5 percent and Technology & Services grew +13.6 percent. Manufacturing grew +12.5 percent while BFSI grew +11.1 percent.
Some of TCS' key sectors, including retail and BFSI, are currently facing a challenging business environment in core markets like the US due to inflation, rising interest rates, a hit to the banking sector's mortgage loan sub-segment, resulting in consumers losing purchasing power, and several other ongoing macro uncertainties, particularly in the top two markets, the US and Europe.
According to leading IT analyst Moshe Katri of Wedbush Securities, TCS’ clients are approaching CY23 IT budgets cautiously though they are yet to see any indications of upcoming budget cycle delays or elongated sale cycles.
TCS has been expanding its existing customer base in terms of wallet share. Katri in his report highlighted that the IT major remains focussed on expanding wallet share from existing clients through its restructured business operations by “aligning customer size/maturity with delivery, with the intention of building confidence while creating cross-selling transformational initiatives; TCS’ business transformation group manages large/mature clients.”
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