 "Should TCS's tepid growth run be cause of worry?")
The short-term impact of the consecutive quarter misses will be evident on the growth numbers for the fiscal year. According to an SBICAP Securities estimate the company is likely to miss double-digit US dollar revenue growth rate in FY16, the first time ever since FY10, as it requires a steep asking CQGR of 3.9% over the remaining two seasonally weak quarters. What this also means is that TCS may not be able to beat Nasscom's industry growth numbers of 12-14% either.
Growth at TCS has been slowing down for sometime. One need not compare the firm with peers in the industry. A comparison of its own numbers for the last 5-6 quarters points towards to this trend. Many analysts for some time now believed that this was due to the base effect. With the company's size and headcount growing strong year-on-year maintaining the growth rate looks difficult. But then players like Accenture and Cognizant are growing faster than the industry average. Cognizant has guided for a 19% revenue growth for CY2015.
Take for instance, the second quarter (traditionally a strong quarter) performance compared to its preceding quarters. The Q2 of FY15 reported a sequential volume growth of 6.1% and 7.3% in Q2 of FY14. The 4.9% volume growth of the company during Q2 of FY16 pales in front of these numbers.
N Chandrasekaran, CEO & MD, TCS has emphatically denied that there is anything wrong with the core of the business. For the quarter he said that the second quarter was one of the best ever in terms of order book that was up 30%. And in general he feels that this is the best time to be in technology space with each and every aspect of business getting digital.
But with a soft second quarter many feel that TCS for the first time since FY10 will miss double digit US dollar revenue growth. "Because it will require a steep growth of 3.9% over the remaining two seasonally weak quarters," said Dipesh Mehta from SBI Securities in his report.
So what is the reason for this slow growth? The answer may lie in the changing nature of the business, and even in the way the company is structured.
"Some part of the easy market share gains of TCS, which it enjoyed over FY11-14, was also due to the incapacity/misdirection of peers such as Infosys/Wipro/others are not so easy in coming today. We believe that TCS has gained over FY11-14 in some measure, from appreciable under-performance of its peers (especially of Infosys, whose clients may be more common with TCS's). Hitherto underperforming peers (Infosys/Wipro) are now tightening (or attempting to tighten) their game (Wipro in large IMS-driven deals and Infosys in some common clients of TCS)," said a report by JP Morgan's analysts Viju George and Amit Sharma.
In Chandrasekaran's words it is the small misses every quarter that is impacting the firms overall numbers. "Every quarter we have had a few basis points miss or a few million dollar miss. But, because it has been happening for five quarters repeatedly, the cumulative effect is showing and people are talking about it," he said.
Analyst believe that the size of the company is such that any major change in technology landscape can impact it more. "They have reached a size when any disruption in technology will have an impact on them. Moreover the traditional business is shrinking day-by-day," said an analyst from a brokerage firm on condition of anonymity.
"In the past few quarters TCS has not been giving its best of performance. They have always believed that lot of work is at the bottom of the pyramid, which maybe correct, but lesser focus on business and vertical centric work may be impacting them. Two, market is yet to recover fully. But it looks like TCS sales and marketing was good enough to address when the market was in lull. With the market recovering deals are not happening only in IT, but outside of IT too and you need a competent S&M team for that," said Sudin Apte, research director and CEO, Offshore Insights.
What is also bothering is the company's performance in its core market, the US. For the Q2, US grew by 3.1% compared to a growth of 4.4% in the preceding quarter. But the number looks dismissal in front of Infosys 6.1% sequential growth. Though the company said that it has witnessed an all around growth some of the verticals continues to grow less than 3%. Add to this weakness in insurance due to Diligenta, Japan and Latin America continue.
One of the biggest positive factor in all this is the growth TCS has been witnessing in its digital spends. The company started to share the growth numbers only from Q1 of FY16 said that the digital is default. While the company is seeing rapid growth in its digital business, a closer look shows that the core business is growing much slower. Digital business grew 10.7% in constant currency and contributed 13.3% of revenues in Q2. Ex-digital business grew around 2% in Q2.
"Agreed the size of the digital business is bigger than its competitors but the fact remains that TCS has chosen to have an organic approach to a segment which is growing very fast and for which competition is taking the inorganic route," said an analyst on condition of anonymity.
Accenture has earmarked $1 billion purely for acquisition, this when it has already acquired a total of 45 companies, mostly smaller ones, in the last three years. The other instance is Cognizant. The company has taken some bold moves in M&A. Cognizant acquired TriZetto in a $2.7 billion deal.
Chandrasekaran defends the company's M&A strategy and says that "It is not that we are short of cash for acquisition, we will go for it if we need it." It is also true that TCS was among the first few companies that started investing in creating its digital portfolio, including the fact that it is training 10,000 employees on digital technologies. Whether it was the firms bet on Diligenta or creating a cloud platform for SMEs called iON or Bank in a Box strategy, TCS has been investing ahead of time.
