All eyes on CEO successor in waiting, BFSI contagion as TCS kicks off earnings season

TCS

An outgoing chief executive officer (CEO). A successor waiting in the wings. A crushing banking crisis -- the January-March quarter has been full of unexpected turns for the country’s biggest information technology (IT) services firm Tata Consultancy Services (TCS).

TCS kick starts the fourth quarter IT earnings season on April 12. A source in the know said CEO-designate K Krithivasan too will be present at the presser even as current CEO and managing director (MD) Rajesh Gopinathan announces the Q4 performance.

The stage is set for Krithivasan to take over as TCS CEO, nearly six years after he was considered for the position alongside Gopinathan.

This TCS earnings call will be unlike any other in recent times, as discussions are expected to take an interesting turn amid anticipation for updates on organisational and business restructuring, a new BFSI head, navigating a global macro environment, hiring plans, and more.

Here are five key aspects to watch out for at the TCS earnings call:

Commentary on business strategy changes

Krithivasan, who was appointed as a the new CEO and MD-designate on March 16, has maintained that there won’t be any great organisational or strategic changes as he takes over and Gopinathan continues with the company still September. The company is also in talks with Gopinathan for further engagement in an advisory role.

However, sources told Moneycontrol that TCS’ organisational overhaul into four distinctive business groups unveiled in April 2022, categorising clients based on their journeys with TCS caused unrest for several senior leaders in the firm. Krithivasan who was then heading the global BFSI vertical reportedly kept his vertical out of these restructured units.

Gopinathan’s current tenure as CEO and MD was to end in 2027. So, his sudden resignation came as a shock. He said that the monotony of earnings for the past 40 quarters and doing the same thing every 13 weeks got the better of him and he wanted to move on to doing something new.

Girish Pai, Head of Research at Nirmal Bang, said in his note, “While the new CEO, K Krithivasan, has not indicated any radical change in strategy, we would wait to see if there are any minor tweaks to it (especially around the new corporate structure of addressing different sets of clients which was instituted a year back and was indicated to be ex-CEO, Rajesh Gopinathan’s idea).”

Impact of the banking crisis

Not just TCS, but rivals too will be tracked closely for any commentary on how the BFSI sector crisis will impact demand outlook and overall global client sentiments. This quarter was marked by the collapse of Silicon Valley Bank (SVB), and Signature Bank of the US, followed by Switzerland’s Credit Suisse and the likely impact on the sectors and industries dependent on it.
As of the quarter-ended December, BFSI accounted for over 38 percent of TCS’ revenue.

Pai said, “The commentary around BFSI will be keenly watched, as TCS has likely got the highest exposure in the Tier-1 set with large relationships developed over the decades in both, the US as well as Europe.”

According to analysts, while the collapse of these regional US-based banks won't have a direct impact on the Indian IT services firms, but there are some delays expected in decision making in the near term, for the next six months.

Revenue growth

According to a poll by CNBC TV18, overall growth for Q4 is expected to be less than in Q3 as uncertainty continues to prevail amidst a tough business environment. Quarter-on-quarter (QoQ) revenue growth estimates have varied from 0.1 percent to 1.7 percent.

Analysts estimate a muted revenue growth on QoQ basis, but TCS is likely to lead Tier-I IT companies in terms of growth reported.

“We expect muted revenue growth for TCS over the next two quarters at 0.1 percent and 0.5 percent QoQ in CC (constant currency) terms due to delay in decision-making in its two most important geographies, North America and Continental Europe, which together account for roughly 70 percent of its overall revenues,” analysts at ICICI Securities said in a note.

Analysts added, “We expect revival of demand starting September 2023 with postponed projects getting executed, along with cost optimisation deals.”

Meanwhile, analysts at Kotak Institutional Securities forecast a much higher QoQ revenue growth at 1.1 percent and 11.2 percent year-on-year (YoY) in CC terms. “Growth will likely be led by spending on cloud and digital programs, cost take-outs and wallet share/vendor consolidation gains. Exposure to impacted banking clients will not materially impact revenue growth in our view in the quarter,” the note said.

So far, the highest QoQ revenue growth estimate for Q4 has been from Nomura at 1.7 percent.

EBIT margins are likely to improve by 40-50 basis points (bps) QoQ from Q3’s 24.5 percent, according to estimates by analysts. Commentary on how the company reaches the pre-COVID margin range of 26-28 percent will be tracked.

Hiring updates

For the first time in the past 10 quarters, TCS reported a slowdown in net new quarterly employee addition at negative 2,197 in Q3FY23. Will there be further slowdown in employee addition, what will be the hiring targets and outlook as we move into FY24 – these will be key questions.

At TCS, attrition rates since the beginning of FY23, have continued to improve. TCS’ Chief Human Resources Officer (CHRO), Milind Lakkad, in the previous quarter said the drop in headcount addition was a “planned” move to improve utilisation rates. TCS, like its peers, had hired in large numbers in 2022.

Analysts forecast that in this quarter too, the hiring numbers will be controlled as it looks to improve margins and utilisation rates.

Commentary on large deal-wins

Irrespective of the global macro challenges, TCS continued to report large multi-year deal-wins last quarter. In February, TCS announced the extension partnership with United Kingdom-based client Phoenix Group in a $723-million deal. According to media reports, TCS is also set to close multiple deals worth $1 billion with British retailer Marks and Spencer (M&S).

While previously TCS had said that it will maintain a QoQ total contract value (TCV) of $7-9 billion, analysts estimate that the company might cross this band in Q4.

“We expect strong deal-wins of $10 bn+ for the quarter, assuming normal renewal component. We do not include TCV from (the) mega deal with BSNL that is likely to be signed with TCS. TCS' commentary on growth outlook will be keenly followed. TCS is expected to be a beneficiary of higher focus of enterprises on cost take-outs and core modernisation,” analysts at Kotak Institutional Equities said in their note.

Will this deal-win momentum continue, what’s the demand outlook for FY24 – these would be worth noting.

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