TCS may continue to face challenges in the coming quarters

Tata Consultancy Services has been struggling to meet market expectations for the last six consecutive quarters and could be trailing the industry growth average this year. While the third quarter is traditionally a weak quarter, the company agrees that some of the growth challenges it is facing may continue for the next few quarters.

“It's a relatively muted quarter. There is no taking away from the fact that the quarter was lower than what we expected as well as what the overall market expected,” Rajesh Gopinathan, Chief Financial Officer at TCS, told BusinessLine .

Gopinathan said that while a diverse portfolio helped India’s largest software exporter sail smoothly through the slowdown in demand about four years ago, the same diverse portfolio is causing problems now. “We have the most diversified geographic spread in the industry, with the US contributing only 52 per cent. We believe that we have to be working in every large market and it has helped us. About 4-5 years, when developed markets started doing badly, other markets supported our growth. Now, growth is practically only in North America. So, everyone else is dragging,” Gopinathan said while pointing out the company will not make any changes in its geographic portfolio.

Within the non-US markets, India has been one of the most challenging markets for TCS. “If you take India, the real issue is that the extent of actual hard investment on ground has not happened. We are a downstream player — first the money has to come in and then we get some. That is not picking up significantly,” Gopinathan said.

In India, the company works on project-based business unlike the annuity business in other geographies. So if the demand does not sustain, Gopinathan warns, there will be volatility in Q-o-Q numbers.

Japan, another troubled region for the IT major, might take a long time to bottom-out and before the company can see positive growth, according to Gopinathan. “Japan plan is that over the course of this year and next year, we will be stabilising and then getting back to growth. But Japan is a complex market and it's not a market that is charaterised by growth,” he said.

In terms of its biggest industry segment, BFSI segment has been dragging because of challenges faced by the insurance industry. Gopinathan said the company’s troubled UK-based Diligenta unit may also take a couple of more quarters before seeing green.

“We are at the last fag end of a large transformation program at Diligenta that we embarked upon 2-3 years back. Starting from sometime in Q1, the incremental reduction will stop. So either end of Q4 or early Q1 is when it will bottom up. But the nature of Diligenta business is such that slow decline is always a part of it. So that requires another large win to cap it out. Whether that happens over the course of next year is something we'll have to wait and see. But the current drag will play out over the next one or two quarters,” he said.

TCS, which faced margin pressures in the third quarter, says growth in digital business has not been able to offset slowdown in core business or even meeting the expectations. “Expectation was that digital will drive even more growth because adoption of digital technologies will scale up into large scale technology adoptions. To some extent we have found that to be muted,” Gopinathan said.

He said the company’s expertise lies in large scale digital transformation projects and such adoptions are not happening at the pace expected. “The acceleration has not come to the extent we had expected,” Gopinathan said.

COMMENT NOW