Environment challenging’: TCS management on global recession fears, IT spending

TCS CEO Rajesh Gopinathan says that the current environment is challenging but cautions to remain vigilant, despite seeing demand resilience across all markets.

Among its  markets, USA led it in the growth with 17.6 per cent in constant currency(CC) terms year-on-year, slightly lower than the 19.1 per cent as compared to the June quarter. This is followed by the United Kingdom 14.8 per cent CC year-on-year, higher than the 12.6 per cent compared t last quarter.

Continental Europe saw 14.1 per cent as compared to 12.1 per cent YoY in June 22 quarter. India’s growth was recorded at 16.7 per cent YoY.

“The environment is challenging and it requires all of us to remain vigilant. We saw good demand resilience across all our markets,” said TCS CEO Rajesh Gopinathan.

On client spending, he said there is an increasing sense of caution but it has not yet impacted our pipeline, he added.

In terms of growth by verticals, retail and CPG led it with 22.9 per cent, followed by communications and media with 18.7 per cent, and technology and services 15.9 per cent.

Manufacturing as well as Life Sciences & Healthcare verticals grew 14.5%, while BFSI grew 13.1%.

Order book stood at US$8.1 billion in 2QFY23 as against US$8.2 billion in 1QFY23 for TCS.

“Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements. As clients prepare for a more challenging environment ahead, technologies like cloud that have been embraced now have to be fully leveraged to realize the promised value,” said TCS CEO Rajesh Gopinathan.

The overall demand environment is good but it is natural to expect so softness from Europe, said N Ganapathy Subramaniam, Chief Operating Officer and Executive Director.

“This was another quarter of excellent execution that saw us delivering several transformational projects like the largest migration of 2.3 million policies to our TCS Insurance platform in one go in the UK, or the trading platform at the Gift City. Our delivery leadership congregated during the quarter and are raising the bar further on execution excellence with frameworks like Rigor in Transformation,” he said.

He said there would be more visibility on clients spending plan from January onwards.

TCS is all sets us up well for the seasonally weak second half of the year, said Samir Seksaria , Chief Financial Officer

“We are steadily making our way towards achieving our operating margin priority for the year, aided by leverage from good growth, the flattening of the workforce pyramid, steadily improving productivity and currency support. Very importantly, the headwinds from the supply-side challenges are abating, so that sets us up well for the seasonally weak second half of the year,” said Samir Seksaria, Chief Financial Officer.

“We believe that IT Services would not remain immune to worsening global macros in terms of rising inflation, economic slowdown, currency headwinds and likely cut on spending. Revenue growth would taper down to low double digit in FY24E, while QoQ decline in order book, clear lower employee addition, higher attrition and lower pricing power ahead would lead to valuation multiple contraction close to its historical averages. Therefore, at present we have SELL rating on TCS,” said Mitul Shah, Head of research at Reliance Securities

“We anticipate pricing to remain relatively stable, lead by its largest financial services segment. Retail could slow on high sensitivity to elevated inflation. We also expect management to tread cautiously on its outlook for 2023 IT budgets,” quoted Bloomberg Anurag Rana, analyst.

Tata Consultancy Services (TCS), on Monday reported a 8.3 per cent rise in consolidated net profit to ₹10,431 crore for the September 2022 quarter.