TCS Q2 growth may suffer because of slump in BFSI, retail businesses

The country’s biggest IT services firm Tata Consultancy Services (TCS) is likely to see continued softness in its banking, financial services and insurance (BFSI) as well as retail verticals in the current quarter, impacting its growth numbers.

In a recent investors’ meet with brokerage firms such as ICICI Securities and Sharekhan among others, the top management of TCS blamed slow recovery in these key verticals for the softness. Company executives said both macroeconomic and client-specific factors have had a role to play.

“Given persistence of issues in the capital markets and European banking sub-segments, growth in the (BFSI) vertical is expected to remain subdued in Q2 of FY20,” wrote Kuldeep Koul and Hardik Sangani, research analysts at ICICI Securities, in a note after their meeting with TCS management. They, however, noted that the deal pipeline in the BFSI vertical remained strong.

On retail vertical, which had faced several client-specific issues in the first quarter of this fiscal, the report said TCS had seen more such problems in the ongoing quarter.

TCS had expected retail revenues to see a quick recovery, which now seems delayed, given the emergence of a few more client specific issues in the vertical, ICICI Securities pointed out. “However, unlike BFSI, where challenges are more broad-based and segment specific, issues in the retail vertical are client specific.”  

BFSI is the largest vertical for TCS, accounting for close to 31 per cent of its overall revenues, followed by retail and consumer packaged goods (CPG), which makes up for around 15 per cent of the total.

In the quarter ended June, TCS witnessed a revenue growth of 9.2 per cent year on year (YoY) in constant currency term in the BFSI vertical, slower than the 11.6 per cent recorded in the preceding quarter. However, the Mumbai-based company’s CEO and MD Rajesh Gopinathan had defended the fall saying that given the high base, the growth remained significant. During the same period, the company’s retail and CPG vertical grew 7.9 per cent YoY.

“Growth rate in the BFSI vertical is expected to decelerate in Q2, considering softness in the US capital market and large European banks. Similarly, client specific issues in retail vertical would impact the TCS growth,” said Sanjeev Hota, Head of Research at Sharekhan.

"Given the weakness in BFSI and retail verticals, achieving double-digit growth rate in FY20 seems challenging," he added.

However, the brokerage firm noted that the organic growth for TCS would remain industry leading among large peers. In Q1FY20, TCS reported a revenue growth (YoY) of 10.6 per cent against Infosys’s 12.4 per cent.

A detailed mail sent to TCS remained unanswered at the time of going to press.

Meanwhile, the TCS management has expressed confidence that the operating margins would improve in the coming quarters. It would also get a leg-up from a falling rupee. In the June quarter, TCS had reported an operating margin of 24.2 per cent.