COMMENT. TCS disappoints again as US business falters

TCS had already tempered market expectations regarding its December quarter results. It had issued a warning last month itself that the Chennai floods had played havoc with its business since almost 65,000 of its employees (about 20 per cent of the workforce) are stationed in the city.

Analysts had made provision for a 90-100 basis points drop in growth due to a week of non-operations and had expected dollar revenue growth for the company to be 0.5 per cent. But the company’s numbers were a disappointment.

Dollar revenues in the December quarter dropped 0.25 per cent sequentially. This is the sixth straight quarter in which the company has missed street estimates. Pressure was seen across verticals. BFSI, the segment that contributes over 40 per cent to the revenue, recorded a muted 0.7 per cent sequential increase in revenues (in the previous quarter, it had recorded 3.9 per cent growth). Retail, where digital spends by clients are the highest, saw a meagre 0.3 per cent growth (vs 3.6 per cent).

In service lines, both, ADM and enterprise solutions and consulting recorded a de-growth.

While the attrition rate improved, the utilisation slipped to 86 per cent from 86.3 per cent in the previous quarter.

The North American market contributes to a little over half the revenue, but, in recent quarters, growth in this geography has been lacklustre for TCS. It saw a 4.4 per cent (sequential) growth in April-June period, followed by 3.1 per cent in the July-September period and 1.4 per cent in the recent quarter.

A muted sales growth in the US, which is leading the globe in digital spends, is disappointing. In the September quarter, Infosys had recorded a strong 6.1 per cent growth in revenues from North America. IT service spends as a proportion of profits of the US companies are still well below their 2007-highs.

So, there is room for an increase. But, of late, analysts point out that US companies are getting more cautious and prefer to declare dividends rather than re-invest as revenue visibility is poor. America’s manufacturing sector shrank for a second straight month in December and the ISM manufacturing index hit the lowest since 2009 (at 48.1) due to lower export demand on a strengthening dollar.

Digital spends by companies, as a shift is made from legacy systems, in order to stay competitive, will be the key driver for growth for IT service players going ahead.

In the December quarter, TCS reported that the digital business contributed 13.7 per cent to revenues, recording a near four percentage point growth sequentially. In the September quarter, the business had recorded 10.7 per cent increase in revenues.

Unlike in the past (between 2010-11 and 2013-14), when there weren’t too many competing with TCS in the offshore market and Infosys was saddled with internal troubles, today the competition is tough. There is pricing pressure and market share gains can be made only by going easy on margins. But TCS doesn’t seem to be making any compromises.

The operating margin in the December quarter stood at 26.6 per cent, down by 50 basis points sequentially, mainly due to cross-currency headwinds and payouts made to affected employees in Chennai.