Rajesh Gopinathan, CEO of TCS, stated at Q2 earnings that the deal pipeline for Q3 appeared encouraging despite the company’s continued vigilance over the macroeconomic condition.
Today is the first day of the third quarter of the fiscal year 2023’s earnings season for the IT sector, with the largest provider of IT services, Tata Consultancy Services, reporting first (TCS).
The following week, on January 12, Infosys, HCLTech, and Wipro would all present their products.
TCS will probably be able to report a respectable performance when compared to its competitors, according to industry analysts, even though the overall growth in the sector is anticipated to be muted in Q3 due to the holiday season, high furlough rates, and macroeconomic challenges creating specific pockets of volatility in client segments like BFSI, high tech, and telecom, etc. But compared to its counterparts, it has the biggest exposure to fragile markets like those in Europe and the UK.
While the strength of our order book and the pipeline for Q3 is somewhat consoling, given the volatility, we remain very attentive and are staying very close to our clients, TCS CEO Rajesh Gopinathan stated during Q2 earnings when commenting on the current quarter’s demand expectations.
Overall Revenue Growth
According to a recent ICRA report, mega deals have already begun to slow down, as have the types of deals that are being won, as clients are reevaluating their technology budgets in light of the war, inflation, unfavorable regulatory changes, and pressure from the recession in markets like the US, which generates close to 60–65% of the revenue for Indian IT services companies and another 20–25% in Europe. According to analysts, TCS’ revenue for the third quarter will reach $6,980 million, or Rs. 56,922 crores, or an increase of 1.5–1.9% in constant currency (CC) terms.
TCS, as compared to its competitors, has the biggest exposure to the European and British markets, which are now the weakest against the US; this may make it more susceptible to the current macro uncertainties.
Leading IT analyst Moshe Katri of Wedbush Securities recently said in a note that despite the absence of any “indications of impending budget delays or protracted sale cycles,” TCS’s clients will continue to be cautious regarding CY23 IT spending. Similar to the September quarter, demand continues to be higher than anticipated, according to Katri.
Demand Might Match Predictions
Over the past few quarters, TCS management has continued to be optimistic about keeping deal win total contract value (TCV) in the $7-9 billion per quarter area.
Kotak Institutional Equities analysts predict that TCV may surpass $9 billion in Q3 as well. Girish Pai, the head of research at Nirmal Bang, predicts that without a significant deal win in Q3, the TCV may remain stable due to “delays seen in decision-making, especially on longer-term projects.”
According to Katri of Wedbush Securities, TCS is still concentrating on increasing its share of the wallets of its current customers by “aligning customer size/maturity with delivery, to foster cross-selling transformational initiatives; TCS’ business transformational group manages large/mature clients.”
Consolidation of Vendors
Vendor consolidation is the newest trend that has surfaced and is likely to benefit Tier-I IT businesses like TCS. Large and mega deals are slowing down, and multi-year transformation deals that were previously broken down among numerous service providers are taking a back seat. However, compared to the overall major digital transformation transactions, these deals will be relatively smaller in scale, according to analysts.
In his report, Pai stated that “vendor consolidation might become the theme for the ensuing quarters and would be a lever of growth for the company.”
Therefore, it will be important to keep an eye on the sectors, deal volumes, and deal nature of deal victories.
The Effect of Furloughs
The discussion of higher-than-anticipated furloughs will be a key subject to monitor, along with a slowdown in demand and decision-making in some industries, such as mortgage, high-tech, telecom, retail, and manufacturing.
The metrics relating to revenue growth will also reflect this. “In CC terms, the revenue growth is probably only 1.6% QoQ, which implies 20 basis points of currency headwinds. Furloughs are anticipated to exceed the prior pattern in the third quarter, according to Motilal Oswal analysts.
“Furloughs will be a big deal. Due to aggressive client expenditure and big deal ramp-up in the last two years, the impact of the furlough was limited.
Kotak Institutional Securities analysts stated, “We anticipate heavy furloughs in high-tech and moderate furloughs in other sectors.
As a result, it is anticipated that the attrition rate will begin to decline. Attrition had likely reached its low last quarter, according to TCS management, who stated that the company would now concentrate on raising the utilization rate. Q2 saw the lowest net new hire addition in the previous nine quarters with 9,840 employees.
Rupee Depreciation will be Profitable
Analysts predict that overall EBIT margins or operating margins will increase/increase by 60-100 bps. Kotak’s experts predict that this will be caused by the rupee’s devaluation against the US dollar and other major currencies, a reduction in supply-side pressures, particularly in India, and overall operational improvements.
TCS management guided for an operating margin of 25% by the Q4’s end last quarter. Any analysis of margins and shifting patterns will be crucial.
