ANALYSIS. Is TCS losing the race because of slow digital growth?

A favourite among investors at one time, Tata Consultancy Services is fast turning into a mammoth that is failing to evolve with time as others are fast catching up on the increasing demand for digital.

India’s largest software exporter’s enterprise value fell to ₹4.86 lakh crore by the end of December, a drop of over 6 per cent over the previous year. The company’s market capitalisation similarly slipped from ₹5.01 lakh crore in Q3 2015 to ₹4.80 lakh crore in the latest Q3, a slide of about 4.2 per cent.

Revenue and profits have grown since last year, but the pace of growth has declined. While Infosys’ net profit grew by 6.6 per cent year-on-year and revenue grew 15.3 per cent for the third quarter, TCS saw 6 per cent growth in profit and a meagre 5.5 per cent growth in revenue.

This is being seen as TCS’ inability to transform itself as a large digital transformation services provider, something that Infosys and Wipro are aggressively chasing.

“Digital will remain the core focus for enterprise IT in 2016 as our customers respond to competition in a global economy driven by real-time insights.

“With 13.7 per cent of our revenues coming from digital business and this segment growing at a higher sequential rate, TCS is playing an impactful role in partnership with customers,” TCS Chief Executive N Chandrasekaran said while commenting on its quarterly results.

But analysts feel the growth in digital business is not fast enough to compensate the weakness in core business. Digital conversations have gone beyond cloud and are hinging heavily on mobility and analytics, two areas where TCS is yet to stamp its presence in a significant way.

“Infosys and Wipro have been more aggressive (than TCS) to work with new-age partners in both mobile and analytics space. More specifically, Infosys and Wipro have also been investing in companies that either already have, or are in the process of creating, stellar intellectual property assets to help automate processes,” said Sanchit Gogia, CEO, Greyhound Research.

What’s pulling TCS back in the digital race is its inability to quickly hunt for and grab fast-growing, futuristic digital companies.

The failure to do so for the company with cash reserves of over ₹25,000 crore is seen as nothing but a cautious measure to avoid burning its finger again.

“One reason they are being conservative is that their earlier acquisitions and investments (France, Japan, Diligenta in the UK) have not paid off. Definitely, acquisitions would have helped TCS the way it has helped Accenture, Cognizant and even Infy and Wipro,” said Pareekh Jain, research director at HfS Research.

TCS was said to be bidding for Dell’s service business acquisition, but nothing much moved there.

In an interview to BusinessLine in October, TCS CFO Rajesh Gopinathan said the company is looking for multiple acquisitions in the $100-million range, but not a single deal has materialised so far.

Infosys was facing a similar trial more than a year ago with management issues. But new CEO Vishal Sikka changed much of that in a very short span of time. In the last one year, Infosys has acquired advanced information management consulting services firm Noah Consulting, automation technology firm Panaya and digital experience solutions provider Kallidus.

It has also invested in a number of digital start-ups.

Sikka also introduced new mid-managers and senior leadership for an ‘outside-in’ perspective and focused heavily on re-skilling internal workforce.

Although TCS has already embarked on a massive re-skilling programme, experts believe the company needs to get leaner and focus a lot more on automation.

There are a lot of things that are still positive for the company. If TCS can get its act together, it could be the opportune time for the company to capitalise on its strengths.

COMMENT NOW