Photo: Bloomberg
Photo: Bloomberg

At TCS, slow conversion rate of orders into revenue adds to seasonal softness

  • Tata Consultancy Services got nearly 46% of its revenues from BFSI and retail business verticals in the past quarter
  • Deal win momentum remains strong, providing good revenue visibility beyond this fiscal year

For Tata Consultancy Services Ltd (TCS) shareholders, 2018 was remarkable—after all, the stock had appreciated as much as 43%. In comparison, 2019 has been slower. But that isn’t much to crib about, considering that the stock has increased by 15%.

Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint

Click here to view enlarged graphic

Given the premium valuations, investors’ focus is invariably on the growth momentum. On this front, year-on-year constant currency revenue growth has slowed to high single digits in the September quarter to 8.4%. For the June quarter, it was at 10.6%. If the recent interactions of the TCS management with analysts are anything to go by, business environment may remain soft for some more time.

For one, the year-end holiday season in the US and Europe, or the December quarter, usually slows the activity for Indian IT services companies. Add to this the continuing weakness in certain pockets of the banking financial services insurance (BFSI) and retail business verticals, which could mean a subdued Q3FY20.

“Management cited that both BFSI and retail verticals would continue to decelerate in Q3FY20E as well. Management also expects overall growth to be affected by furloughs, lower working days and certain macro issues," Sharekhan Ltd said in a note. TCS derived nearly 46% of its revenues from BFSI and retail business verticals last quarter.

What’s more, the softness may percolate down to the next quarter. Customers are delaying or optimizing their spending on the legacy business, especially on some large maintenance contracts, said analysts who met the TCS management.

This means even as the order inflows and pipeline remains strong, revenue momentum can remain soft for the rest of the fiscal year, or at least till the time clients finalize fresh spending budgets for 2020. “In spite of strong total contract value (TCV), conversion of backlog into revenues is happening slower than expected as clients try to optimize their run spends in an uncertain macro," analysts at Prabhudas Lilladher Pvt. Ltd said in a note. In the September quarter, TCV, or the order inflows, stood at $6.4 billion, the highest in the past six quarters.

Nonetheless, the company is withstanding the challenges better. Deal win momentum remains strong, providing good revenue visibility beyond this fiscal year.

The life science and healthcare vertical, which grew 16% last quarter, should maintain the momentum. Ramp-up of large deals is expected to aid other business segments (manufacturing and energy). Therefore, any notable improvement in pressured business verticals can easily lift the company’s growth rates. “Management is hopeful of FY21 being better and expects momentum in large verticals like BFSI/retail to improve as pressure on run business recedes," Nomura Financial Advisory and Securities (India) Pvt. Ltd research said in a note.

My Reads Logout