TCS on track to clock 15% growth in FY14

Company sees revival in discretionary spends and BFSI

Tata Consultancy Services (TCS) has clearly beaten its nearest rival Infosys, in the game of predictability. The company not only expects to grow revenues at a steady pace in FY14 but analysts also expect it to beat Nasscoms growth forecast of 12-14 per cent. The company has conveyed to analysts that it expects revenue growth to be front-ended. The first two quarters are typically better than the latter two and the company expects the same trend this year, too.

Unlike some of its peers, TCS is not facing any stress either geographically or in terms of verticals. The company expects this years growth to be driven by manufacturing, retail and financials. The management has conveyed to analysts that the banking, financial services and insurance (BFSI) segment bottomed out last year and this year the vertical should grow ahead of the companys overall growth. Manufacturing and retail, which grew 21 per cent and 25 per cent in FY13, will continue to put up a strong show this year, too.

The only segments that would not grow in line with overall revenues would be telecom and high-tech. The Street is estimating the companys dollar revenues to grow 4.1 per cent sequentially in the first quarter. A three to four per cent sequential revenue growth would imply the company is on track to deliver 15-16 per cent year-on-year revenue growth in FY14. Analysts say the companys deal pipeline suggests a pick-up in discretionary and BFSI projects in the US. The traditional information technology (IT) business is growing at a fast clip in Europe.

Unlike what the market expects, the decline in the rupee will not have a material impact on the companys margins. For starters, operating margins are likely to decline 200-250 basis points as the quarter will see the impact of wage hikes, but this would be partially offset by the rupees eight per cent decline in May. The company intends to invest gains accrued from the lower rupee back into the business. Another positive is that the pricing environment seems stable, despite the falling rupee. Though its business as usual for TCS, it is broadly understood that revenue growth moderates when the rupee depreciates. Consequently, no fireworks are expected from the company. Morgan Stanley believes that with the rupee depreciating sharply in the first quarter FY14, demand side commentary for large India IT vendors would remain neutral/modest.