TCS has won a good number of deals, and its management remains cheerful. Unsurprisingly, TCS should report a third consecutive good quarter
Delhi: Tata Consultancy Services Ltd’s chief executive officer Rajesh Gopinathan is a happy man. Since taking over as CEO in February last year, Mumbai-based TCS, under Gopinathan, with every quarter, has only improved, and in turn proved critics of the company and naysayers, including analysts and industry executives, wrong. TCS, which until December was struggling for growth, now expects to clock double-digit growth in the current financial year (TCS last reported 15% growth in 2014-15).
On Thursday, TCS declares its second-quarter earnings. The company has won a good number of deals, and its management remains cheerful. Unsurprisingly, TCS should report a third consecutive good quarter.
These are the five things to watch out for in TCS’s second-quarter earnings on 11 October:
1. Revenue growth and management commentary for the financial year: TCS is estimated to post a sequential dollar revenue growth of 3.3% in the July-September period, according to an analyst at brokerage JM Financial Institutional Securities Ltd. This is higher than the 1.6% sequential growth recorded in the first quarter. Management commentary on the demand outlook for the six months of 2018-19, with the October-March period being tepid for IT services, will be crucial.
2. Performance in key industry segments: One wrinkle in TCS’s early stages of a turnaround has been modest growth in its banking and financial services industry, or BFSI, segment which accounted for 31% of the company’s total revenue. TCS reported 3.7% sequential constant currency growth in BFSI in the April-June quarter. Still, TCS’s larger rival, Accenture Plc reported 3% constant currency growth from its clients in the banking space in the June-August period (Accenture follows a September-August financial year). This weak performance could signal a worry as it possibly suggests that large banks are still not spending enough. For this reason, management commentary on demand from TCS’s banking clients will be eyed.
3. Growth in digital: TCS’s digital business grew 45% year-over-year in the first quarter and now accounts for 25% of the company’s revenue. Accenture still continues to see double-digit growth in its digital business, which constitutes about 60% of its total revenue. For this reason, TCS’s growth in the fast-growing digital business will be eyed by analysts to see how the company is making itself future-proof.
4. Update on Ignio: During the first quarter, TCS celebrated three years of its artificial intelligence (AI) platform Ignio. Ignio got $31 million in revenue last year. Agreed, this is tiny: TCS ended with $19.1 billion in revenue for the year ended March 2018. However, it is heartening to see a services-focused company earning business from products and platforms. TCS expects to generate over $100 million in revenue from Ignio by March 2020. Finally, homegrown IT services firms are looking to leverage their proprietary products and platforms to differentiate their service solution offerings, and for this reason, management commentary on Ignio will be significant.
5. Impact of cross-currency and the rupee: During the first quarter, TCS reported 4.1% sequential constant currency revenue growth. The company’s dollar revenue growth was slower at 1.6%, implying a negative currency movement shaved 250 basis points off its business growth. Revenue growth at TCS, like its other peers, will again be hurt on account of currency movement, although the impact will be less than in the preceding quarter. A depreciating rupee will lift the company’s profitability.