by Suhani Adilabadkar

IT consultancy major TCS reported 5% YoY revenue growth in Q4FY20, its slowest performance in the past nine months. Though TCS management is optimistic in navigating Covid-19, the analyst community has turned cautious on India’s largest software company. Long considered the jewel of the Tata Group - TCS contributes about 75% of the Tata Group's profits -  the firm encompasses services, consulting and business solutions,  service integration, digital transformation services, cognitive business operations and products and platforms servicing the world’s largest businesses. 

The company operates through five key verticals, banking, financial services & insurance (BFSI), retail and consumer business, communication media and technology (CMT), manufacturing, life sciences and healthcare, energy, resources and utilities, public services and others. The operations of TCS run across North America, Latin America, United Kingdom, Continental Europe, Asia Pacific, India, Middle East and Africa. The company has been historically growing faster than the market, at a rate of 9% in dollar terms compared to a CAGR of 2% of the IT-BPM services industry in the past five years. 

Quick Takes:

• TCS reported 5% YoY revenue growth in Q4FY20, the slowest in the past nine months.
• Operating margin was resilient at 25.1% but impacted by slower growth and lower utilization in Q4FY20.
• The company reported a TCV of $8.9 bn, highest since the company started reporting this disclosure.
• Citigroup Global Services acquired by TCS at the height of the 2008 financial crisis, and the company may be eyeing similar such takeover opportunities in the coming quarters. 

Muted March  Quarter FY20

TCS stock price struck an intraday high of Rs. 1,851 on April 17, rising 5% after the March  quarter results were announced on April 16. Revenue was reported for the fourth quarter at Rs. 39,946 crore against Rs 38,010 crore in the same period, previous year rising 5.1% YoY. In dollar terms, revenue came out at $5,444 mn, flat YoY in Q4FY20. 

Operating margin was resilient at 25.1% in the March quarter, the same as in Q4FY19 impacted by slower growth and lower utilization in projects as customer approvals for work from home were delayed or not received. PAT or net profit de-grew by 0.7% YoY reported Rs. 8,093 crore in Q4FY20 compared to Rs. 8,152 crore corresponding March  quarter FY19.  Cash flow from operations was at 109.4% of net income and attrition rate   for Q4FY20 was at 12.1% , best in the industry. TCS reported TCV (total contract value) of $8.9 bn, highest since the company started reporting this disclosure. Strong deal flow in March quarter FY20 was buoyed by $1.5 bn Walgreens Boots Alliance (global leader in retail and wholesale pharmacy) and $2 bn Phoenix Group (insurance) orders. 

Sluggish growth = Global Slowdown + Coronavirus pandemic

After reaching its peak in Q4FY19 at 12.7% YoY revenue growth, TCS engine has slowed down considerably, moving at just 5.1% YoY in Q4FY20. Growth has been impacted by the global slowdown and lately by the pandemic. Mr. Rajesh Gopinath, CEO and MD, TCS said, “The lockdowns across the world in response to this pandemic have tested the agility, resilience and adaptability of our delivery model...we have come out stronger and our model is more proven than ever before”. 

With respect to vertical operational performance, BFSI lagged with 1.3% (CC) YoY deceleration. The next big contributor was retail growing at 4.2%, followed by communication and manufacturing at  9.3% (CC) YoY and 7% (CC) YoY respectively while technology & services came out at 3.5% (CC) YoY with best performance put up by life sciences & healthcare growing 16.2% (CC) YoY. 

Continental Europe was topped the chart in geographic performance, reporting 11.9% (CC) YoY growth followed by stable performance by the UK at 5.4% (CC) YoY, Asia Pacific and Latin America expanded at 3.5% (CC) and 3.9% (CC) respectively. North America, contributing almost half of the revenue basket was flat, India de-grew by 1.9% while MEA grew at a slow rate of 1.3% YoY (CC). 

Growth Pangs for the IT Major

Q3FY20 was already a muted quarter for TCS impacted by lacklustre performance of BFSI and retail verticals together accounting for about 45% revenues. There was tightening of spends among large banks in North America in BFSI while  the UK and retail business witnessed financial stress among US retailers. The management had already guided a soft Q4FY20 operating amidst a challenging global environment. 

After the coronavirus pandemic struck the global business environment, operating models and structures are in for a heavy overhaul with respect to customers, employees and regulatory guidelines. In response to lockdowns across the world, TCS has transitioned from a highly centralized model consisting of work spaces set in large delivery campuses to the SBWS model (Secure Borderless Workspaces). Roughly, 90% of its employees are now enabled to work through SBWS model. 

According to management, the last couple of weeks of Q4 reversed the positive momentum being built in the first two months of March quarter FY20. BFSI space suffered the most, impacted by regulatory and compliance hurdles with respect to time consuming transition into its new operating model.

Though retail reported resilient growth, travel, transportation and hospitality sub-verticals were sharply hit. Life Sciences, even with strong growth was also not immune as elective surgeries were cancelled impacting subsegments such as medical devices and specialty hospitals. Similarly, communications and media verticals were impacted by cancellation of sporting events, closure of amusement parks and studios. 

Global Financial Crisis 

“We believe that the peak negative impact from the current situation would be comparable to the peak impact of the GFC (Global Financial Crisis), which happened 10 years back. It would be in that ballpark, plus or minus a few percentage points”, Mr. Gopinath said alluding to what the company is expected to witness in the next two quarters. The company will witness the Covid-19 impact in Q1FY21, spilling over in the September quarter and recovery is expected from Q3FY21. 

TCS is aiming to exit Q4FY21 at Q3FY20 absolute levels. The company has been undertaking rationalization of the employee pyramid, increasing intake of freshers and moderating on the middle level as one of the cost levers to maintain margins.   

No sector or industry or country is immune to Covid-19 and its adverse economic and social impact. Already witnessing adverse rumblings of coronavirus, BFSI (low interest rate regime), energy ( falling oil prices), retail  and manufacturing impacted by social distancing norms,supply chain issues and complete shutdown of travel and hospitality sectors will have a deep negative impact on IT industry, especially our domestic IT majors highly dependent on US, UK and European markets. 

Consequently, decision making by clients have delayed, purse strings are tightened to conserve cash in volatile times coupled with lower pricing power and higher costs of work from home operating models for the IT industry.

In the current scenario, TCS is a reliable and resilient Tier I player due to its high-quality management team, wide and varied bandwidth of services, ability to manage stable margins, strong cash flow generation, automation skills and execution track record. Thus, while the rest of the peer group, especially mid-tier companies might struggle in a Covid environment, TCS might go for the kill, expanding its market share and usurping any M&A opportunity that comes its way. Citigroup Global Services was acquired by TCS at the height of the 2008 financial crisis, and the company may be eyeing similar such takeover opportunities in the coming quarters.