TCS Q2 shows there's more than just hype to all the buzz around digital

After TCS’ better-than-expected results for the quarter ended September 2020, it would be hard not to believe the buzz around migration cloud, analytics and all things digital. Rajesh Gopinathan, CEO, said as much when he interacted with media persons after the results.

Going by the company commentary, the technology transformation that COVID-19 accelerated is pretty much here to stay and looks sustainable.

The company’s over-20-quarter high growth of 4.8 percent QoQ comes on the back of what India's largest software exporter describes as a multi-year tech transformation cycle, where clients are migrating to cloud, investing in digital collaboration tools and touchless technology.

In the current phase companies are building cloud-based foundations, which will be the digital core over which they would further build newer business models and customer experiences, Gopinathan said.

The investment the company has made in these transformative technologies over years and training and building its talent landscape makes it well-positioned to cater to these changes, he explained.

In addition, NG Subramaniam, COO, TCS, said the company is helping clients realise and accelerate the value of tech investments they have made by offering micro services, building partnerships and ecosystems.

The kind of growth the company has seen is reflective of its ability to cater to the changing customer needs, the leadership added.

True enough. Over the last few months there has been enough evidence that as the world emerges out of COVID-19, IT firms would be the largest gainers. IT stocks were rallying over the last six months and are likely to continue their trajectory in the coming months as well. The stock prices of the top four IT firms have risen by 50 percent on average in the first six months of this fiscal.

Ashok Soota, founder, Happiest Minds, in an earlier interaction pointed out that IT services has always been the first industry to bounce back, and probably gain, from a crisis. The coronavirus pandemic would not be an exception, he had said then.

The evidence is there for all to see. TCS recorded Rs 40,135 crore in revenue for Q2, up 4.8 percent quarter-on-quarter in constant currency. While revenue growth came in at a 25-quarter high, operating margins hit a 8-quarter high at 26.2 percent for the quarter, Amit Chandra and Apurva Prasad, Institutional Research analysts at brokerage firm HDFC Securities, said in a note.

The company’s deal closure for Q2 stood at $8.6 billion -- a mixture of large, medium and small deals, and hence broad-based.

This stellar performance, as analysts put, comes at a time when industry watchers expected the growth to return to pre-COVID-19 levels from the January-March quarter or even later at the beginning of Q1 FY22. This unprecedented acceleration in Q2 comes as a surprise.

That is why the growth Q2 has seen is telling for a couple of reasons. Tech spending is clearly accelerating and top IT majors will continue to gain market share through vendor consolidation.

Retail, which was among the worst hit due to the pandemic, and BFS have bounced back. For TCS, they grew 6.2 percent and 8.8 percent QoQ respectively.  The uptick in BFS and retail aided the growth of the North American market, which the company said was soft in Q1, Gopinathan said.

In fact, the top five banks have increased their tech spend by 7 percent in the June 2020 quarter compared to 5 percent in Jan-March 2020. Though this did not reflect in Q1 for IT firms, they will now see these spends translate to deals, pointed ICICI Securities in a note. Retail giants, too, are stepping up tech spend to improve their online presence and are accelerating their digital transformation journey.

This is important given that BFS accounts for over 30 percent of TCS' revenue.  Retail, and consumer and packaged goods account for about 15 percent. Both these service lines declined in the June quarter.

BFS and retail account for a significant share of revenues for most Indian IT firms and this uptick will bode well for its peers too.  However, the sector picture would be clearer once its peers announce their results. Infosys, Wipro and HCL Tech are set to announce results on October 14, 13 and 16 respectively.

Even as there is plenty to be optimistic about, IT firms will continue to remain cautious, at least in the near term.

The so-called 'second wave' of infections has already begun in Europe. The uncertainty on the medical situation in key geographies, furloughs and possible pull forward of some growth from future quarters may be driving this caution,  ICICI Securities research analysts, Sudheer Guntupalli and Hardik Sangani, pointed out in a note.

TCS’ UK market grew 3.8 percent QoQ on a constant currency basis. According to Gopinathan, the region is structurally volatile and weak, and the company would continue to be cautious in that market.