TCS said peak virus impact on revenues could be like that in the global financial crisis (GFC), or more
In Q4 of FY09, firm’s organic revenues had fallen over 10% year-on-year, representing peak impact
Tata Consultancy Services Ltd (TCS) has a tradition of burning its fingers trying to provide qualitative guidance to investors, rather than quantitative ones that peers such as Infosys Ltd and Wipro Ltd provide.
Wipro said on Wednesday that it is withdrawing its practice of providing quarterly revenue guidance because of all the uncertainty covid-19 has caused.
But TCS has stepped up on the task of providing indicators. India’s biggest IT services company said the percentage drop in the near term could be like that during the Global Financial Crisis (GFC), or even worse. This implies huge declines in revenues in the June and September quarters on a year-on-year basis.
And then it added that year-on-year growth rates could begin to look flattish in the December and March quarters, or at least that is what the company is using in its internal models.
“We are in the midst of challenging times…the storm is going to get lot worse but we will get better," said Rajesh Gopinathan, chief executive officer and managing director of TCS, in an online media conference.
Going by the GFC playbook, revenue can fall as much as 10% year-on-year in the quarter when the impact is the greatest. In FY09, this happened to be the March quarter, although reported numbers don’t reflect this because of the integration of an acquisition.
Year-on-year decline in revenue stayed at about 7-8% for the next two quarters during FY10. This time around, even if things bounce back by the December quarter, investors should look at a decline of about 5% in annual revenue in FY21.
But, by all means, the impact of covid-19 and the related lockdowns is far higher than the impact of GFC.
For TCS, this is evident even in its March quarter results, even though the lockdowns impacted service delivery and client demand only in the last two-three weeks of March. According to analysts at Emkay Global Financial Services Ltd, TCS’s revenue is down 1.2% sequentially in constant currency terms. The company didn’t report the figure this time around.
Analysts at Kotak Institutional Equities had estimated growth in revenue of about 0.6%, assuming that the impact on two-three weeks of work will amount to only a roughly 1% hit on revenue. The fact that the impact is much greater, and so soon into the crisis is clearly a worry.
TCS did well to maintain operating margin at above 25%, although this is silver lining, given the large expected drop in revenue.
The good news for TCS investors is that the company is well positioned in terms of its cash balance and its transition to a new service delivery model. But while all that is good, a large expected drop in revenue will unsettle investors, and the impact is likely to be seen when stock markets resume on Friday.