Tata Consultancy Services Ltd (TCS), India’s largest information technology (IT) services firm, is on track for double-digit growth in the current fiscal year, the second consecutive year of strong growth, without sacrificing its industry-leading profitability, TCS chief operating officer, N. Ganapathy Subramaniam said.
At the heart of TCS’ confidence is the higher growth rate with which it started the current financial year and healthy deal wins.
TCS started the current fiscal year with a 3.6% growth rate in constant currency terms, as against 2.8% in April last year. This is the highest at which TCS has started a financial year in five years since growing 15% in 2014-15.
Additionally, a higher number of deal wins over the last 12 months should also help the company achieve double-digit growth, according to Subramaniam. TCS, which started disclosing the total contract value of deals last year, said it won $21.9 billion worth of deals in 2018-19.“So now we are roughly a percentage point more this year in exit rate," Subramaniam said in an interaction at Mint’s newsroom in New Delhi on Thursday.
“We started last year with 2.8% and we managed to grow double-digit and end with 11.4% (in constant currency terms). Now we are starting the year with higher growth secured, so we should be able to continue, plus with all the deal wins, all the TCVs (total contract value) that we have signed up. There’s no point in going back and losing focus on that (double-digit growth). We are still focused on achieving that double-digit growth," said Subramaniam, who clarified that this should not be interpreted as guidance because TCS does not give any quarterly or yearly growth outlook.A strong exit rate sets up TCS well for the current year. A 3.6% exit growth implies that even if TCS does not report any growth in each of the four quarters of the year, the company will grow at 3.6% or add $753 million in incremental revenue in the current year.
TCS reported an 11.4% growth rate in constant currency terms to end FY19 with $20.91 billion in revenue. Currency fluctuations took away some sheen and the company managed a 9.6% dollar revenue growth, adding $1.82 billion in new business.
TCS’ strong growth is in contrast with its closest competitor, Cognizant Technology Solutions Corp., which slashed its full-year growth forecast by 44% earlier this month to give an estimate of 5.1% at best. If Cognizant meets its growth forecast, it will add $823 million in incremental revenue in the calendar year 2019, just $70 million more than what TCS has secured even before the end of the first quarter of 2019-20.
“Falling profitability is the issue faced by all the companies," said a Mumbai-based analyst at a domestic brokerage.
“TCS has done well on growth but what needs to be seen is if the company can sustain its current margins, especially as its rivals are outlining lower profitability," said the analyst.
TCS’ operating margin expanded 80 basis points to 25.6% in FY19. However, it was still 10 basis points lower than 25.7% in the year ended March 2017.
Infosys Ltd, which ended with 22.8% operating margin last year, expects full-year profitability to be between 21% and 23%, while India’s third largest IT firm, HCL Technologies Ltd has also lowered its profitability guidance to be between 18.5% and 19.5%. For now, Subramaniam, who took over in his current role in 2017, tried to assuage concerns over falling profitability.“I want to stay focused on our 25-26%. There is something called rigour, execution, and operational excellence. We remain focused on these. Also, it is the company’s philosophy that you do not compromise margins for growth as you will get neither. The third point is that we have invested heavily in our business over the decades. What I mean by that is that we were the first one to go to China and other overseas locations to set up development centres in high-cost locations. So there is no reason for me to even want to look at that numbers (of rivals)," said Subramaniam.