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Business News/ Companies / TCS falls behind Infosys on revenue growth
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TCS falls behind Infosys on revenue growth

TCS's 3% dollar revenue growth pales against that of smaller rival Infosys Ltd, which reported 6% sequential growth

Mumbai-based TCS, which was growing at a breakneck pace over the last several years, saw its revenue growth sag over the last few quarters. Photo: Priyanka Parashar/MintPremium
Mumbai-based TCS, which was growing at a breakneck pace over the last several years, saw its revenue growth sag over the last few quarters. Photo: Priyanka Parashar/Mint

Mumbai/Bengaluru: Tata Consultancy Services Ltd (TCS) on Tuesday reported a tepid 3% revenue growth on a sequential basis for the quarter ended September, missing Street estimates, as persisting weakness in some key markets and industries weighed on India’s largest software services company.

Mumbai-based TCS’s financial performance paled in comparison with that of its closest rival Infosys Ltd, which beat expectations a day ago with a stellar 6% revenue increase in the fiscal second quarter over the preceding three months.

TCS management, despite the growth slackening, put on a brave face, saying that it had been “a very good quarter" and growth was “broad-based".

“And our order book has been the strongest. In fact to give you a perspective, our order book is now 30% more than what we have had in our best quarter," said chief executive officer N. Chandrasekaran.

The subdued performance for the second successive quarter means that for the first time in seven years, Infosys has had a better six months than TCS. The last time Infosys posted higher revenue growth than TCS for the first two quarters in a row was in the April-June and July-September quarters of 2008.

TCS, which consistently outperformed analysts’ expectations over the last several years, has been battling a slowdown in its business momentum for the last nine months. The company’s growth has been hamstrung by weakness in its insurance business, especially at its UK-based unit Diligenta, and uncertainties surrounding clients’ spending in the energy and telecommunication segments.

The company’s growth has also been marred by the weak pace of expansion in Japan—a market that it entered in partnership with Mitsubishi Corp. last year, and some emerging economies such as Latin America.

In the July-September period, TCS’s dollar revenue grew 3% to $4.2 billion from the previous three months, when it clocked a 3.5% increase. The company had been expected to post an increase of 3.6%.

Net profit rose 3.2% sequentially to $926 million.

In rupee terms, revenue grew 5.8% sequentially to 27,165 crore in the three months ended 30 September. Net profit rose 6.1% to 6,055 crore.

A Bloomberg poll of 32 analysts had predicted TCS would post a revenue of 27,229 crore and a profit of 6,027 crore.

“The softness around Latin America has been overcome," said Chandrasekaran. About the softness in business momentum in Japan and Diligenta, he said. “I expect that to continue for a few more quarters."

In spite of the challenges, growth was “broad-based", led by banking and financial services, retail and life sciences industries across the UK and North America markets, Chandrasekaran said.

Even as Infosys reported strong second-quarter results on Monday, it lowered the dollar revenue growth outlook for the full fiscal year, citing sharp fluctuations in global currencies and cautioned of issues cropping up at some of its clients in a seasonally weak second half. Adjusting for currency fluctuations, Infosys said it continues to expect, at best, a 12% dollar revenue growth this fiscal year.

Analysts say Infosys has clearly got a lead over TCS in business momentum.

“I would think the company management is being very conservative when it retained its growth guidance of 10-12% in constant currency terms for this financial year," said an analyst with a Mumbai-based international brokerage who declined to be named.

“For TCS, the growth is slowing. So it will be a surprise if Infosys continues to trade at a discount to TCS going forward," he said.

TCS declined to comment if the second half of this fiscal will be better than the second half of fiscal year 2014-15. In the third and fourth quarters of last fiscal, TCS hardly reported any growth, and for this reason analysts said it will be challenging task ahead of TCS to record a 10% growth in this financial year.

The third and fourth quarters are traditionally weak for Indian IT companies as most of their clients temporarily shut down business during the year-end because of Christmas and New Year holidays.

“So TCS will need to have 3.9% growth in the third and fourth quarters to have a 10% growth in dollar terms for this fiscal," said another Mumbai-based analyst with a domestic brokerage who declined to be named. “It will be a challenge, to put it mildly," he added.

But Chandrasekaran said he did not see anything unusual in the market where clients are holding back on technology spending.

“Third quarter has its usual challenges, of less number of working days," he said. But the overall business momentum remains good, he added. “Our order book (of outsourcing deals) is 30% higher than the best ever we have got before."

Chandrasekaran’s optimism was also driven by a strong 11% sequential growth in the company’s digital business. TCS had in July said it generates $2 billion in revenue from the digital technologies, including automation and artificial intelligence, that it offers to clients.

TCS and most other outsourcing companies are shifting their focus from the traditional low-margin services business, that included maintaining third-party software and hardware infrastructure of clients, to sophisticated new technologies such as cloud computing, data analytics, mobility and security software.

The company said it is increasing the number of people it will hire this year to 75,000 from its previously set goal of 60,000.

TCS added 10,685 employees in the three-month period, after adjusting for staff resignations, while roughly 86% of its staff were employed on technology projects.

It also added three new clients in the quarter who brought in more than $100 million in annual revenue, taking the total number of such clients to 33.

On Tuesday, TCS shares rose 0.2% to 2,597.40 on the BSE, while the benchmark Sensex shed 0.2% to end at 26,846.53 points.

Results were announced after the close of trading.

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ABOUT THE AUTHOR
Varun Sood
Varun Sood is a business journalist writing on corporate affairs for the last fifteen years. He also writes a weekly newsletter, TWICH+ on the largest technology services companies. He is based in Bangalore. Varun's first book, Azim Premji: The Man Beyond the Billions, was brought out by HarperCollins in October 2020.
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Published: 13 Oct 2015, 05:26 PM IST
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