What drove TCS’ blockbuster Q3 performance?

Pivot to digital

At the back of COVID-19, clients are spending more on cloud migration, application modernisation and other technology. IT services firms such as TCS could benefit from this.

During the media briefing on January 8, TCS Chief Executive Rajesh Gopinathan elaborated that these technologies, be they digital transformation or cloud migration, are hardly new. “In fact we started talking about digital transformation way back in 2010,” he said.

But adoption was a challenge since enterprises did not have the right flip from the business case perspective for large-scale adoption, he said.

However, companies are beginning to realise the benefits of these technologies — be it business continuity or cybersecurity — as a result of the pandemic and this is resulting in large-scale adoption.

In a recent interaction with Moneycontrol, V Ramakrishnan, CFO, TCS, said: “Some of the customers who had been “fence-sitting” on some decisions like cloud adoption have accelerated that.” In addition, with the situation improving on the ground, the decision-making cycle would improve as well, he added.

In a note, brokerage firm Motilal Oswal said: “Given TCS’ size, capabilities, and portfolio stretch, it is rightly positioned to leverage expected industry growth. Additionally, TCS has consistently maintained its market leadership and shown best-in-class execution.”

This is what has reflected in the $6.8 billion total contract value (TCV) the company signed for the quarter. The company reported TCV of $6 billion for the same quarter last year.

Increased outsourcing

As clients look to cut cost, outsourcing to IT services players is gaining momentum and TCS is one of the beneficiaries of this transition.

ALSO READ: Interview | TCS to recruit 40,000 from campuses in FY22, says CFO V Ramakrishnan

In November, TCS took over two IT units of its clients — Deutsche Bank’s Postbank Systems and Prudential Financial’s tech unit Pramerica Systems Ireland. As a result, close to 1,500 people from each of the two units joined TCS.

Kawaljeet Saluja and Sathishkumar S, research analysts, Kotak Institutional Equities (KIE), noted in their recent report that the value of these deals stood at $550 million and $300 million, respectively.

This may develop into a trend and continue because clients are under pressure to control costs and yet have to invest in new-gen technologies as the pandemic pushed them to change their business models. For instance, in the case of retailers, they had to pivot to digital channels to ensure business continuity.

IT services players such as TCS have a huge role to play here “by not only taking over the resources (headcount) but also accelerating the core transformation journey,” Saluja and Sathishkumar pointed out in their report.

While such recent deals were from Europe, 2021 will see momentum gain in the US as well. In their note, Saluja and Sathishkumar said that these deals can provide impetus to growth of tier-1 offshore players for the next 2-3 years.

“This is something which we also look for,” said Ramakrishnan. “This is with existing customers we have a strong relationship with. And it also helps us to expand our own ability in certain geographies in certain countries,” he added.

Broad-based growth

Broad-based growth from across sectors, primarily banking and financial services and insurance (BFSI), played an important role in TCS’ performance.

While growth from other sectors continues to be in the negative, manufacturing and retail and CPG, which account for about 10 percent and 15 percent of the total revenue, saw better growth momentum compared to the last two quarters.

Is this growth sustainable?

According to the company’s commentary, this growth is sustainable, as TCS sees a multiyear growth opportunity. That is also the reason it has projected double-digit growth, which a KIE report has estimated to be 12.1 percent in FY22.

Explains Gopinathan: “We initially see this as a multi horizon trend, initially seen as the base case adoption.” Then, in the next stage, companies will start exploiting the capabilities of many of these platforms.

Finally, the true borderless organisation concept kicks in. “Then we will see business model transformation and industry transformation at scale,” Gopinathan explained during the media briefing. “We are gearing ourselves for that by sustained investment in both our capabilities as well as our partnerships and ecosystems,” he added.

Analysts agree. IT firms that have partnered with hyperscalers such as Amazon Web Services, Google and Azure can benefit from the public cloud adoption over the next few years, followed by scaling up of technologies such as big data and analytics.

What does this mean for its peers?

Analysts have pegged a positive outlook for its rivals too, at the back of the digital transformation. TCS’  Bengaluru-based peers Infosys and Wipro will announce their results on January 13 and HCL Tech will announce its Q3 results on January 15.

Infosys is expected to lead the industry in terms of growth, as it had over the last two quarters. The firm, under CEO Salil Parekh, was an outlier registering positive growth momentum even as its peers reported a decline in revenue. The company registered 1.45 percent YoY revenue growth between April and September 2020 whereas TCS and Wipro’s growth declined by close to 4 percent for the same period.

Wipro, under its CEO Thierry Delaporte is stepping up its efforts to regain the lost growth  momentum. The last few months have seen the firm sign large deals, including a $700 million deal with German firm Metro AG last month.

HCL Tech has a strong digital foundation play, which is digital infrastructure, and Engineering and R&D, where it is one of leading players. This is expected to drive growth for the company.