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Despacito—the biggest takeaway from TCS's Q1 earnings results

For the patient investor, the Indian IT behemoth has most things going for it, including a straight-talking old hand who's the new CEO

Harichandan Arakali
Published: Jul 13, 2023 02:22:58 PM IST
Updated: Jul 13, 2023 02:43:56 PM IST

Despacito—the biggest takeaway from TCS's Q1 earnings resultsK Krithivasan, CEO, TCS Image: Courtesy TCS
Tata Consultancy Services’ (TCS) famed execution capabilities came to fore on Wednesday, with profits exceeding street expectations and a larger-than-expected order haul, when India’s biggest IT services company reported first quarter earnings for the fiscal.

However, for those who might have harboured any lingering hopes of a quick turnaround in the $245-billion sector’s prospects, it also became clear that it is definitely facing its own version of a funding winter.

CEO K Krithivasan summed it up in simple terms: “We have not grown this quarter,” he told reporters in a conference in Mumbai, after revenues missed some analysts’ expectations. The “global demand softness” that muffled Q1 sales is expected to continue into the foreseeable future, Krithivasan and his top leaders said.

Sales for the three months ended June 30 were $7,226 million versus $7,195 million for the January to March quarter of 2023, a 0.4 percent increase in reported terms and flat on constant-currency basis, which eliminates the effect of exchange rate fluctuations. Analysts at Mumbai brokerages Motilal Oswal and Emkay Global were expecting 0.7 percent and 1 percent increase, respectively.

The world’s biggest corporations in America, Britain and Europe, who account for the bulk of the revenues of the Indian IT industry, have turned their collective tap off on “discretionary spending” as good-to-have projects are called in the industry. They remain worried about the global macroeconomic condition.

The focus is sharply on IT projects that will help them cut costs and save money.

Demand remains strong, as reflected in the $10.2 billion order book that TCS garnered in Q1, compared to $8.2 billion a year ago, and topping the company’s own projection of $7 billion to $9 billion in total contract value.

TCS doesn’t provide a breakdown of large contracts, but barring one large contract, with Nest of the UK, most of these contracts were around $50 million to $70 million, “those type of deals”, COO NG Subramaniam, said in the conference yesterday.


Of the $10.2 billion in total contracts won during Q1, about half came from US customers, Subramaniam said. From a vertical perspective, financial services, TCS’s biggest practice, contributed more than $3 billion worth of orders.

However, in comparison with the January to March quarter, the ongoing deceleration becomes apparent. Revenue declined in North America (-0.3 percent) and Continental Europe (-0.9 percent), analysts at Kotak Securities wrote in a note to clients after TCS’s results. Among verticals, revenue declined quarter on quarter in BFSI (-0.8 percent banking, financial services and insurance), telecom (-1.1 percent) and hi-tech (-0.7 percent).

“Most clients are focussed on a few things. AI (artificial intelligence), of course, cloud transformation, cyber security, and digital projects,” Ray Wang, principal analyst and founder at Constellation Research, an IT advisory in the US, wrote in an email to Forbes India. “They are working hard to renegotiate software vendor contracts and consolidating IT spend where they can.”  

IT budgets have not become constrained, but IT heads or CIOs at the large companies “just have more pressure in demonstrating return on investment”, he said. “In fact, clients have more projects, but the same budgets and less time to complete them in.” And customers are also taking as much as two to three months longer than in better days to sign off on the contracts, according to Wang.

COO Subramaniam echoed this: Customers are more comfortable signing smaller deals because it gives them flexibility in the context of today’s uncertain economic scenario, he said. “They also want to sign up more short-term deals where the return on investments is seen… and they can be agile about decision-making and getting things done quickly,” he said.

Also read: IT services outlook: Strong demand, weak spending story to continue


In Europe, the macroeconomics continue to be mixed, Dominique Raviart, a practice director for IT services, based in France, at the consultancy NelsonHall, wrote to Forbes India in an email. The region was officially in a recession due to Germany, Raviart said, but the EU has been resilient in the face of everything, from the war in Ukraine to high energy prices and inflation, all contributing to industry slowing down.

The calendar year’s second quarter also had one or two fewer working days in Europe, depending on the country, and several local IT service vendors had also warned about a slowdown, he said.

For the rest of calendar 2023, most vendors have maintained their guidance, and early indicators around consulting and staff augmentation are positive, he said. Clients are still seemingly able to tolerate price increases, he said.

Decision-making is delayed on the smaller systems integration projects and discretionary spending by one to two quarters, while negotiations continue on the multi-year contracts. There is still appetite for large deals in the region, he said.

Also read: Why are the largest Indian companies contributing lesser to economic growth

Relative strength

At TCS, in addition to the 840 million pound, 10-year contract from Nest, other notable deals include the policy administration of Teachers Pension Fund and extension of a contract with Phoenix Group to include new policies from the acquired entity, analysts at Kotak write in their note.

One factor that’s significant, according to the analysts, is that these contract wins and extensions happened on the back of TCS’s platform capabilities. The wins also involved market share gains from weaker vendors, they said.

The Nest deal was in competition with Atos while the policy administration of Teachers Pension Fund saw TCS pitched against Capita, according to the Kotak analysts, who have an ‘add’ rating on the company’s shares.

Britain emerged as a bright spot for TCS in Q1, where a 4.9 percent sequential increase in sales helped the company shore up its total revenues in the face of the decline in the US and continental Europe.

“TCS is better-positioned than others to gain wallet share and will be at the forefront of cost take-out agenda of clients, a necessity in a constrained spending environment,” the analysts write.

The company has a balanced portfolio between discretionary and run-the-business services, which mirrors global IT spending today. It also has a diversified presence across verticals, geographies and the ability to support its clients’ agenda to save money and improve business operations, they said.

In Mumbai, Krithivasan said on Wednesday, with respect to all markets and not just the EU: “There is no major panic in the market for clients to talk about pricing pressure or discounts. There is a reprioritisation happening and we believe growth will resume sometime.”

And that sums it up. For now, the company is handing out full variable pay to 70 percent of its staff and the rest get pay-outs based on their performance and that of the company, Chief HR Officer Milind Lakkad said. He confirmed reports of delays in onboarding some fresh recruits and reiterated that the company would honour every offer letter. In time.

Meanwhile, generative AI is only generating a lot of conversations but no revenue, Subramaniam said. Enterprise customers would like to see a lot more depth in terms of security and trustworthiness of these solutions, and can’t be expected to embrace it with the same enthusiasm as “people like you and me”, he said.

Overall, be prepared to take it slow.

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