Captains Speak     

Published: November 15, 2024
Updated: November 15, 2024

Tata Consultancy Services

Mixed portfolio blunts headwinds 5 new clients in $ 100 mn bucket

The demand outlook at TCS continues to be cautious in the last few quarters. Little wonder that during Q2FY25, the same trend persisted and the company saw a significant decline of 23 per cent with the order book amounting to $ 8.6 billion.

Revealing this at a conference call organized to discuss the company’s working during Q2FY25, Mr Krithivasan, CEO and Managing Director, added that “this comes at a time when the IT industry is yet to see the impact of the recent interest rate cut by the US Federal Reserve.

According to him, the total contract value (TCV) for the quarter was 23.2 per cent lower as compared to $ 11.2 billion in the same quarter a year ago, and was up 3.6 per cent from the previous quarter. Several large deals wins were dominated by the retail sector, a majority including Croma. Interestingly, many of them were business transformation and digital transformation deals — unlike the perception that customers are only spending on efficiency and cost take-out deals.

As regards the company’s working during Q2FY25, Mr Krithivasan revealed that its performance demonstrates the resilience of the company’s portfolio amid the uncertainty of the geopolitical situation. Its biggest vertical, BFSI, shows signs of recovery. Growth markets also continue their strong performance. Revenue during Q2FY25 increased by 7.6% YoY to Rs 64,259 crore. In dollar terms, revenue for the quarter stood at $ 7,670 million, a growth of 6.4 % YoY.

INDUSTRY STATS

According to him, industry verticals BFSI, consumer business and healthcare grew by 0.1% YoY in CC terms, manufacturing grew by 5.3% YoY and energy, resources and utilities vertical grew by 7% YoY, while regional markets grew by 504% YoY. On the other hand, technology & services, and communication & media declined by 1.9% and 10.3% respectively in CC terms.

All growth markets grew above the company average. India grew by 95.2% YoY in CC terms, the Middle East and Africa grew by 7.9%, Asia Pacific grew by 7.5% and Latin America by 6.8% YoY in CC terms. Among major markets, the United Kingdom grew by 4.6% YoY and continental Europe grew by 1.8% YoY. However, North America declined by 2.1% YoY. EBIT margins for the quarter stood at 24.1% in Q2FY25, a sequential decline of 60 bps.

The CEO said the company faced headwinds of 60 bps due to an increase in third party expenses on account of one large transformation project which is running at its peak, and another of 70 bps due to an increase in head count and investment infra. According to Mr Krithivasan, the company’s long-term investments for sustainable growth will continue in talent acquisition and development, strengthening the ecosystem and opening alliances, and setting up delivery centres in near-shore centres. Its net margin in Q2 was 18.5%.

STAFF COUNT

According to Samir Seksaria, CFO, the total workforce stood at 6,12,724 with a net increase in head count by 5,726 on a sequential basis. The company is on track to hire freshers for the year and has commenced the recruitment process. LTM attrition for IT services stood at 12.3% in the quarter, which is below the comfort range of 13% for the company. The workforce remains diversified across 150 nationalities and 35.5% women employees. TCS’ers have clocked 26.1 million learning hours year-to-date , and have acquired 2.6 million competencies year-to-date. As regards client metrics, Mr Seksaria said that the company has added 5 clients in the $ 100 million+ bucket, 6 clients in the $ 20 million + category, 18 clients in the $ 10 million + category, 22 clients in the $ 5 million category and 35 clients in the $ 1 million category on a YoY basis. Pointing out that the company’s order book is steadily growing, Mr Krithivasan added that its reported TCV order book was $ 8.6 billion for Q2FY25. The TCV of deals signed in North America stood at $ 4.2 billion. The BFSI TCV stood at $2.9 billion, and the Consumer Business TCV stood at $ 1.2 billion. The pipeline across geographies is at an alltime high for the company. The Gen AI and AI TCV is doubling every quarter and is also strong. The company is doing around 600 engagements in Q2 in AI and Gen AI, when compared to 275 engagements in Q1FY25. In Q2, around 86 engagements went into production compared to 8 in Q1.

CAUTIOUS CLIENTS

As regards the outlook, he maintained that the company is witnessing some signs of improvement, primarily in the BFSI vertical in North America. The company’s diversified portfolio and investments are yielding results. The demand outlook continues to be cautious in the last few quarters. Key business themes are cost optimization, vendor consolidation, customer experience transformation, supply chain modernization and risk. Globally, clients continue to drive efficiency through cost optimization programmes and demand for discretionary spending. In BFSI, financial intuitions are looking to sustain the growth momentum. Stability in the macro-economic environment provides confidence to the institutions. With the easing of interest rates, consumer confidence and industry confidence is expected to get better, which can potentially lead to improved investments.

Customers are focused on operational efficiencies and upgrades in efficiency and automation. The pipeline continues to remain strong. However, the company is yet to see large transformational deals in BFSI. In NFSI, banking and insurance showing strength while there is weakness in capital markets. In the consumer business, the company saw demand for customer engagement and personal engagement, business process transformation and Gen AI as key focus areas.

FESTIVE FACTOR

In the retail sector, customers are taking a cautious approach due to the macro-economic uncertainty and the geopolitical situation. Consumer spending in the upcoming holiday season will also play a crucial role in determining budgets for transformation initiatives.

In manufacturing, the company is witnessing some pressure. Labour and supply chains are impacting the business of the industry, which is expected to be short-term. However, barring the above, manufacturing is witnessing a strong demand environment. Smart manufacturing and software design vehicles are the mega trends. Demand is expected to pick up in the next few quarters.

In life sciences, the company expects stability to return in Q3 and a return to growth in Q4. Technology, software and services witnessed sequential growth for the second quarter. Cost optimization and vendor consolidation remains the top priority for the tech, software and services customers who continue to be cautious on capex investments and transformation initiatives. Media and communication vertical clients are focusing on the bottomline and RoI.

According to Mr Krithivasan , the company remains committed to long-term EBIT margins in the range of 26- 28%. He said the board has recommended an interim dividend of Rs 10 per share.

Mr Krithivasan added, “We saw the cautious trends of the last few quarters continue to play out in this quarter as well. Amidst an uncertain geopolitical situation, our biggest vertical, BFSI, showed signs of recovery. We also saw a strong performance in our growth markets. We stay focused on sharpening our value proposition to our clients, employees and other stakeholders.

According to Mr Seksaria, “We made strategic investments this quarter in talent and infrastructure to ensure sustainable growth. Our disciplined execution resulted in superior cash conversion. Our longer-term cost structures remain unchanged, and we remain confident in our ability to continue delivering industry- leading profitable growth.