TCS’ 2.5 per cent sequential drop in revenues to $5.4 billion for the March 2020 quarter has confirmed the worst for investors — IT services companies are going to take a serious hit in the midst of the Covid-19 pandemic.

The fall in revenue was mainly due to disruptions caused by moving employees to work from home, but the company has sewn up deals worth $8.9 billion as well. This can see it through the tough times ahead considering many businesses worldwide are going to cut spending. It will be interesting to see when these deals are operationalised though — the company’s management did point out that they aren’t seeing any delays. With over 90 per cent of its staff working remotely, and delivering projects in time, the management doesn’t foresee any disruptions to its operations.

The margins for the quarter came in at 25.1 per cent and were flat quarter-on-quarter. The company managed to post decent margins in the face of the pandemic due to a 60 basis point (bps) fall in other expenses.

FY20 numbers

The silver lining in the pandemic cloud is that for FY20 TCS has managed to top $22 billion in terms of revenues. As a whole for FY20, revenues rose 5.3 per cent year-on-year in dollar terms. EBIT margins for the full year were down 100 bps YoY at 24.6 per cent. This is also below the aspirational band of 26-28 per cent.

Pandemic impact

As the world locked down, TCS saw some delay in starting project delivery because of compliance and regulatory approvals that were needed. This has impacted the revenue in the March quarter.

The first two quarter of FY21 are going see the most impact, according to the management projections. This estimate does seem very optimistic. TCS’ management said that their current model predicts revenue in the quarters ending December 2020 and March 2021 to be at the same levels as in the corresponding periods in 2019-20. Essentially, year-on-year revenue growth for September-December 2020 quarter and January-March 2021 quarter will be flat. That will be a huge pick-up in quarter-on-quarter revenue growth from the first half.

In terms of offers and increments, except for the 30,000 offers it has given to freshers, the company has frozen fresh hiring and salary hikes for all employees. The management said they will not be letting go of any employees.

TCS doesn’t break down revenues from each industry or geographies that it serves, so it makes it difficult to judge the quarter-on-quarter performance of either. Based on available information, it appears that the banking and financial services industry was impacted during the quarter as revenues fell year-on-year by 1.3 per cent. The life sciences (up 16.2 per cent YoY), communications and media (9.3 per cent) and manufacturing (7 per cent) industries saw revenues grow at a fair clip.

Belt tightening

The company’s main operating geography — the US — saw YoY revenue growth nearly flat. This is a concern area as the US is one of the worst affected regions in the world from the Covid pandemic.

With many states in the US extending the lockdown due to the rapid spread of Covid, the company’s newly minted distributed or dispersed model of operations will be tested. However, the management is confident that working on a dispersed operating model is the future. The management said that it has realised that only 25 per cent of its employee strength need to come in physically to its offices to support the rest of the staff. And this model will be adopted till the pandemic-led crisis ends.

What this will immediately do is cut a lot of facility-related costs and help TCS reach its aspirational 26-28 per cent margin band annually, which it has struggled to achieve in the past five years.

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