TCS results suggest IT industry’s fights have worsened

Indian IT firms have struggled for growth for quite a while now. Growth of top-tier IT companies fell to around 9% in the June quarter, compared to a near-term peak of 14%

Indian IT firms have struggled for growth for quite a while now. Growth of top-tier IT companies fell to around 9% in the June quarter, compared to a near-term peak of 14%, according to analysts at Nomura Research.

But things are not turning better. Tata Consultancy Services Ltd (TCS) reported a just 1% sequential growth in constant currency terms for the September quarter, much less than the 2.5% increase the Road had estimated. On a year-on-year basis, increase stood at 7% in constant currency, a steep drop from the 10.1% increase reported by the business in the June quarter.

About per month ago, TCS said in a filing with exchanges that some of its customers— especially in the banking, financial services and insurance (BFSI) vertical—are holding back on discretionary spending. While it was expected to affect growth, no one had anticipated growth of only 1% compared to the June quarter. As it turns out, sales in the BFSI segment grew 1.2% last quarter, which means other verticals had struggles too.

Ajay Negi/Mint

Click here for enlarge

TCS said revenues from the retail vertical dropped, besides which postponement of work in its India business led to sluggishness in overall revenues. While it’s true that some other verticals did better with increase of 3- is the increase of the entire portfolio.

TCS shares are expected to fall when trading resumes on Friday, according to analysts, although since the stock has underperformed peers since its growth warning last month, the fall may be restricted somewhat.

Just TCS shares traded at a 19% premium to Infosys shares; the premium is now down to less than 4%. This premium overly may vanish on Friday, unless, of course, Infosys’s results announcement is equally disappointing.

But that’s barely something to be excited about at a period when growth is faltering. Notice that employee prices fell by more than 70 bps, fostering gross margins. It seems that variable pay has come down on an overall basis, with growth perhaps being short of internal expectations.

Regardless, it’s always hard to keep gross profits when growth is slow. Unfortunately there’s no clear handle on when growth will revive. The company seemed confident about near-term demand according to its interactions with its customers and projects in hand, although it included that it’s not easy to forecast the way the macroeconomic situation plays out.

JPMorgan’s analysts said in a 5 October note to customers that it’s unsurprising that growth is lower than previous years, “given the multiple cyclical and structural /time-bound headwinds today hitting on the sector in conjunction ”.

They record as many as 12 challenges the sector is facing, including commoditization of the heritage business, which is leading to cost and volume pressures; increased competition from multinational firms for example Accenture Plc and Capgemini SA; and a rise in the amount and size of prisoner centres. When spending by BFS industry has ebbed and all of this is happening at a period.

The fashion in which growth rate is ’sed by TCS has fallen previously few quarters, it’s clear that the business is currently facing more challenges than it can manage.