TCS results likely to raise hopes of digital-led recovery

The second-quarter results of Tata Consultancy Services (TCS) are likely to raise optimism about a recovery in the IT sector. The results—expected on Wednesday evening—may also validate expectations that the world’s biggest companies—many of which are TCS’s customers—were stabilising operations after the six-month disruption due to the Covid-19 pandemic.

India’s largest IT companies are expected to benefit as their customers in America, Europe, Australia—their biggest markets—and elsewhere prioritise investments in technology to urgently digitalise their operations because of the pandemic. TCS, Infosys, HCL Technologies and Wipro are some of the companies that are expected to see a growing share of their revenues come from supplying digital technologies and helping customers move to the cloud faster.

“The three enormous industry tailwinds for Indian IT which is supporting broad-based acceleration include increase in priority for tech spend/budgets over other budgets for enterprises, compression of timelines for core IT systems transformation, cloud migration and multi-cloud interoperability, and vendor consolidation,” analysts at Mumbai brokerage HDFC Securities wrote in an October 1 note to clients.

The analysts expect TCS to say sales for the three months ended September 30 rose by 1.7 percent in constant currency over the previous quarter when revenues fell. The larger IT providers, in particular, such as TCS and Infosys would benefit from vendor consolidation, as some of their recent contract wins and deal expansions suggest. “We expect the total deal contract value to be robust for TCS,” the analysts wrote.

TCS’s recent contract wins or expansions include those with European insurer Phoenix Group, British supermarket chain Morrisons, Swedish retailer Coop, and the UK unit of Swiss power and automation group ABB.

The Covid-19 pandemic is prompting companies to accelerate their tech strategies, according to analysts. “Covid has acted as a catalyst for acceleration in IT spends,” analysts at Kotak Securities wrote in a recent report. “We believe that global outsourcing spending will accelerate from 4 percent to 5 percent (over) pre-Covid level numbers.”

This is because of three factors, they explain. First, there is a surge in cloud adoption. Companies are looking to reduce costs and capture the innovation of the cloud. Cloud also provides the foundation for better access to data for new business outcomes and models.

Second is the need for reshaping customer experiences. Online has become the only channel of engagement for companies with customers during the pandemic. Companies have been investing in the experience layer for some time, although the pandemic changes the scope, scale and time-to-market for it.

Finally, companies are looking at “core transformation”. The true power of digital can be tapped only with an operationally resilient, lean, adaptive and cloud-enabled core. Clients continue to run legacy systems that are an operational bottleneck for innovation and transformation initiatives. Core transformation is a necessity for organisations to truly harness capabilities of digital technologies, the Kotak analysts wrote.

Recently, TCS revealed the results of a survey it had conducted, titled ‘Digital Readiness and COVID-19: Assessing the Impact’. The company found that 90 percent of its respondents are maintaining or increasing their digital transformation budgets amid the pandemic. The global survey engaged almost 300 senior business leaders from large enterprises—97 percent with revenue above $1 billion and 44 percent above $10 billion—spanning 11 industries across North America, Europe and Asia.

The analysis compared businesses that had more advanced digital capabilities in place prior to Covid-19, referred to as ‘leaders’, with those that had fewer, if any, in place, known as ‘followers’. The study showed that fewer leaders (64 percent) have seen their revenue decline, compared to followers (73 percent). Leaders had better business visibility and a more confident outlook, with 74 percent of them expecting revenues to bounce back within two years, compared to 54 percent of followers.

“Before the pandemic, companies’ digital capabilities were rapidly becoming central to their success and business transformation initiatives. However, our study revealed how several enterprises were not as far along in developing a digital backbone as they hoped,” Rajashree R, chief marketing officer at TCS, said in a press release. “Companies that had embraced digital transformation more wholeheartedly performed better during the pandemic and expect a faster rebound, whereas others are now focussed on making necessary investments and racing to catch up.