Mumbai: Tata Consultancy Services Ltd has been an outlier in the first-half of 2018-19: the Mumbai-based information technology company added $936 million in incremental revenue in the first six months of the current financial year. This is about $151 million less than $1.08 billion in new business done by Infosys Ltd and Wipro Ltd together in 2017-18.
Unsurprisingly, shareholders have chased shares of the company: TCS shareholders saw a 40% return in the last calendar year, far higher than the 6% and 25% return made on investing in the benchmark BSE Sensex and BSE IT index, respectively.
Still, the job has just started for Rajesh Gopinathan, who took over as CEO in February 2017 after his mentor and chief craftsmen of TCS Natarajan Chandrasekaran was entrusted to oversee Tata Sons.
TCS, India’s largest information technology (IT) services firm, which ended last year with $19.09 billion in revenue, needs $1.9 billion in incremental revenue to clock a 10% dollar revenue growth. Simply put, this means that despite TCS reporting a 10% year-over-year dollar revenue growth in both the June and September quarters, it still needs to do $972 million in new business in the October-March period to end the current financial year with a double-digit dollar revenue growth.
This should not be daunting for TCS as the management continues to be buoyant and the company continues to edge past its rivals in winning orders. Unsurprisingly, TCS should report a third consecutive good quarter on Thursday.
Mint turns the spotlight on five things to watch out for in TCS’ third-quarter earnings on 10 January:
1. Revenue growth and management commentary for the financial year: TCS is estimated to post a sequential dollar revenue growth of 1.4% in the October-December period, according to an analyst at brokerage JM Financial Institutional Securities Ltd. This is less than the 3.2% sequential growth recorded in the second quarter, but then October-December is weak season for IT firms on account of fewer working days (translating into lower billing hours for engineers deployed by IT vendors). Management commentary on the demand outlook for the fourth quarter and for the next financial year will be crucial.
2. Performance in key industry segments: The first half of the year has seen TCS, along with its rivals, post modest growth in business from the banking and financial services industry or BFSI, which accounted for 31% of the company’s total revenue. TCS reported 3.5% sequential constant currency growth in BFSI in the July-September quarter. Management commentary on demand from its banking clients will indicate whether the sector has finally turned the corner.
3. Growth in digital: TCS’ digital business grew 60% year-over-year in the second quarter, after reporting an impressive 45% y-o-y growth in the first quarter. The business now accounts for 28% of the company’s revenue. Accenture still continues to see double-digit growth in its digital business, which constitutes about 60% of its revenue. For this reason, TCS’s growth in the fast-growing digital business will be watched by analysts to see how the company is making itself future-proof.
4. Will TCS share business from individual digital components? TCS’ chief operating officer told this paper in October last year that the company is considering outlining business from some individual components of the digital business. Any such move will be helpful, reckon analysts, as it will help them gauge how TCS is positioning itself against its global peers, like International Business Machines Corp. (IBM) and Accenture Plc, which have started sharing business from artificial intelligence areas and cloud computing. More clarity on how the firm is faring in these growth areas will further reaffirm faith of shareholders.
5. How resilient is the business model? Concerns about a slowdown in US economy poses the biggest risk to TCS and its peers. For this reason, last month saw a few analysts quiz the management of Accenture on the resilience of its business model. Accenture shrugged off any such concerns, claiming its heft should allow it to benefit from clients looking to cut on outsourcing spending should economic growth slow. TCS comments will help analysts gauge the strength of the homegrown IT industry.