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Can TCS sustain the current margin growth in 2016?

This is the question in mind after noting another muted Q4 FY’15 performance (INR 242,198 mn) by TCS with 1.1 p.c. QoQ decline in constant currency

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Sanghamitra Kar
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TCS

Thomas George

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This is the question in mind after noting another muted Q4 FY’15 performance (INR 242,198 mn) by TCS with 1.1 p.c. QoQ decline in constant currency revenue term. Many analysts started voicing their apprehension on its growth plan for FY 2016, in light of its Q4 headwind and spoilsport verticals like telecom, energy, Diligenta (its UK based subsidiary) and cross currency movements. However, manufacturing, life sciences & healthcare, retail and Hi-Tech industry vertical grew above the company average growth in constant currency terms during the same quarter. The life sciences especially grew by 3.9 p.c. q-o-q after a sequential decline in its previous quarter.

TCS was successful in adding 4 clients in its US$100mn plus annual revenue band category. Company witnessed QoQ revenue growth in IMS and ADM service lines and geographies spurring growth during Q4 were Americas, APAC, MEA, Japan & India. On the occasion of completing 10 years of listing, company rewarded one‐time special employee reward worth 2,628 cr, which has impacted its profit after tax and brought it down to 15.9 p.c compare to 22.2 p.c in third quarter. Company also declared an increase in wages of 8 p.c and 3 p.c for off-site and onsite employees.

During Q4, the other income was INR 1,129 cr on account of forex gains and it was comparatively higher from its Q3’s other income of INR 630 cr. TCS revenues from 7 SaaS platforms grew 55% YoY to USD125m, and it will be launching its AI-based Automation platform in next quarter. All 5 pilot projects on AI are well received by the clients.

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TCS closed 9 deals during Q4 FY15 and the management is confident of bettering the NASSCOM growth projection of 12 to 14p.c. However, with the enterprises not really increasing their IT spending in US and UK; TCS will find it challenging to grow and sustain the operating margin growth levels in the coming quarters coupled with various structural shifts taking place in the market.

As management expressed confidence and improved scenario of better enterprise IT spending during FY 2016, the expert opinion that IT spending are going to be restricted due to slower growth in sales across enterprises among developed nations. Specially, financial sector which contribute close to 40% of IT sector revenue’s has shown a weaker growth. Telecom sector has been witnessing a global consolidation and recent crude oil price crash has put pressure on sales growth and capex of energy companies, which will impact their IT spending, while sectors like manufacturing, retail and life science has provided some ray of revivals.

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Another factor which might impact the growth in the coming years would be the ‘wave of automation’ which is an outcome of customer’s ask ‘to do more for less’. This could impact and taper the IT service provider future growth. We started witnessing many automation companies directly approaching clients.

These developments and changing landscape will create structural shifts in the market and it will determine whether IT providers like TCS will sustain their last 5 years growth momentum with its newer capabilities and focused service approach like RTB (Run The Business), CTB (Change The Business), geographical expansion (in Japan and France) and early investment into non-linear areas like IMS and Digital coupled with local leaders driving various regions across globe.

Mr. N. Chandrasekhar sets the tone of TCS future intent loud and clear by sharing its goal of pursuing US $5b revenue from ‘Digital’ vertical in few years’ time. If not in the immediate quarters but with its right blend of capabilities TCS is poised to move into the next 5 years of growth orbit.

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