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Five things to watch in TCS’s March quarter results

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2016-04-17 12:44:14

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Is the worst over for Tata Consultancy Services Ltd (TCS) ?

 

That’s the biggest question facing India’s largest software services exporter ahead of its March quarter earnings report on Monday.

 

TCS has recorded six quarters of slow revenue growth since July 2014, while rival Infosys Ltd has managed to dramatically improve its performance under the leadership of Vishal Sikka who took charge in August 2014.

 

TCS shares are down 0.16% since then, while Infosys’s stock has gained more than 40%.

 

Analysts expect TCS to report revenue growth of at-best 7.2% (in dollar terms) for the year ended 31 March 2016. That will be the slowest annual growth at TCS since 2009, when Natarajan Chandrasekaran took charge as its chief executive.

 

Less currency volatility should offer some respite for TCS in 2016-2017, but it’s hard to ignore the long list of challenges it faces currently.

 

For starters, its key customers are in no mood to spend. Some of the world’s largest banks and insurance firms are holding back from awarding large technology work to outsourcing firms.

 

Cognizant Technology Solutions Corp. first flagged this concern at the start of the year when it predicted revenue growth between 10% and 14% in 2016, while Infosys reported a 0.3% sequential decline in revenue from the banking, financial services and insurance (BFSI) segment when it reported fourth-quarter results last week.

 

Since BFSI accounts for more than 40% of TCS’s revenue, any weakness in the segment will make it harder for the company to grow.

 

To add to TCS’s woes, it has underperformed international rivals, such as Accenture Plc, when it comes to offering value-added services to existing clients. Despite TCS’s claim of over 13% of its revenue coming from the digital space or from helping clients in areas such as cloud computing, analytics, social and mobility platforms, it has not helped its overall growth.

 

That is because TCS and other Indian IT firms are far from doing “high-margin transformation business” for clients, analysts say.

 

Some of Chandrasekaran’s bets in the last few years have also failed to bear fruit.

 

For instance, TCS’s ambition to generate more business from Japan led it to partner with Mitsubishi Corp. in 2014, but its Japanese business continues to lag.

 

Other sore points include its cloud-based platform iON and its UK-based backoffice unit Diligenta Ltd.

 

Here’s a list of five things to watch out for when TCS submits its quarterly report card:

 

 

1. Revenue growth

 

Brokerage BNP Paribas SA expects TCS’s revenue to rise 1.7% to $4.21 billion in the January-March period on a sequential basis. Any growth will bring some relief to investors as dollar revenue growth fell in the year-ago period. Although TCS does not give quarterly or yearly outlook, management commentary on demand levels will be crucial.

 

 

2. Weak links

 

Investors and analysts will want an update on the Japan business, as well as Diligenta, and what Chandrasekaran has in mind to turn them around. He had earlier indicated that Diligenta’s problems could end by the fourth quarter. Industry watchers will also look for commentary on the BFSI segment.

 

 

3. Currency fluctuation

 

Infosys’s comments indicate that IT firms expect the rupee to depreciate against the US dollar. TCS, which generates about 54% of its revenue from the US, should benefit, albeit a little less than Infosys that generates close to 61% of its revenue from that country. Management commentary on other currencies, including the British pound and euro, will be important.

 

 

4. Show me the orders

 

During the July-September period, TCS claimed its order book was the strongest ever, with about 30% more than the company ever managed in any quarter. TCS, however, did not disclose its order book size. Many outsourcing deals are long-term contracts, and IT vendors can generate only about 3-4% of revenue from new orders in the first year and about 12-15% in three-four years, according to Viju George, an analyst at JPMorgan Chase and Co.

 

Considering it has been more than nine months since TCS talked about its huge order book, many believe the firm should start seeing business from the orders won in the second quarter of last year.

 

 

5. Is TCS being able to retain talent?

 

For over five quarters, more employees have been leaving TCS, with the company’s IT services ending the third quarter with an attrition rate of 15.3%. For Infosys’s IT services arm, it is 12.6%.

 

 

 

 

Although IT firms generally report a low attrition rate during the fourth quarter, any uptick in this number could mean that TCS may see more worrisome attrition rates in the first quarter of 2016-17.

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