New opportunities for TCS amid Covid-19 turbulence

Despite the global economic disruptions caused by the Coronavirus pandemic, predominantly in the second half of February and March 2020, Tata Consultancy Services (TCS), India’s largest IT company by market value, managed to hold its head above water for the quarter ended March 31.

But that’s just for now. By the management’s own admission, TCS’ performance in the near term is going to mirror the decline in business seen during the peak of the global financial crisis in 2008-09, before getting gradually better. But more importantly, the company management’s commentary on the potential opportunities and challenges before the company over the next couple of years holds key insights into how the future of work itself will likely change with companies choosing to adopt a more resilient business model.

Mumbai-based TCS announced its earnings for the quarter and financial year ended March 31, 2020, on April 16. The company reported revenue of ₹39,946 crore for the January-March 2020 quarter, up 5% over a year; and a sequential growth of 0.2%. Net profit for the period stood at ₹8,049 crore, down 1.3% over a year; and 0.8% sequentially.

The increase in revenue was on account of two large-value deals that TCS closed during the quarter (with Phoenix Standard Life and Walgreen Boots Alliance) and an overall TCV (total contract value) of $8.9 billion in deal wins reported during the quarter. TCS managed to do relatively well vis-à-vis operating profit margins. At 25.1%, the EBIT margin for the March 2020 quarter was aided by a sharp 60-basis point sequential reduction in costs; as well as rupee depreciation benefits.

Of the total impact on revenues seen in the March quarter, around 33% was on account of demand-led softness, while the remaining was a loss of revenue due to supply-side challenges, with many financial services clients delaying approvals for their projects to be managed by TCS staffers working from home. This impacted profit margins as well, due to lower utilisation levels. In the first quarter of FY21, the company expects most of the impact on revenue to be on account of subdued demand.

An Emkay Global research report noted that despite TCS setting itself an aspirational EBIT level of 26%-28%, its EBIT margin in FY20 came below this threshold for the fourth year in a row (at 24.6%). With business expected to remain subdued in FY21 as well, TCS may miss this target next fiscal. The company has indicated that it will strive to get back to an EBIT margin of around 25% by March 2021. For FY20, TCS reported revenue of ₹1.57 lakh crore, up 7% over a year; net profit of ₹32,340 crore, up close to 3% over the previous financial year.

“At the beginning of the year, TCS guided for double-digit revenue growth in FY20 and expected strong momentum in financial services and retail verticals to continue. However slowdown in BFS (banking and financial services) technology spending, volatility in retail spends, and weak manufacturing led to growth moderation throughout the year and led to the company delivering 7.1% growth, well short of the earlier anticipated double-digit growth,” the Kotak report observed. “This once again shows the limitations of the guidance process when there are significant changes to the external environment.”

TCS’s management told analysts during an earnings call on April 16 that it expected revenue to sharply tank in the June 2020 quarter (mirroring the highest sequential decline of 5.8% witnessed by the company previously in the December 2008 quarter during the global financial crisis) as well. The company will see weakness likely persist in the first half of FY21, and see a gradual recovery in the second half of the current fiscal. At least two brokerages, Emkay Global and Kotak, have indicated that the optimistic scenario foreseen by the management for the second half of FY21 might be difficult to realise, given the onerous market conditions.

“We cut FY22 revenue estimate by 2%-3%. We forecast a revenue decline of 3.5% in constant currency terms in FY21, followed by a recovery in FY22. A decline in revenue will impact margins, which we expect to correct by 90 basis points in FY21,” the Kotak report says.

However, more significant than the financial implications of a recessionary environment due to the global pandemic is the way in which companies around the world will think about tweaking their business models, and the role TCS can play therein.

For instance, during the ongoing crisis, a number of engagements undertaken by TCS were to re-orient the supply chains of companies to ensure resilience and the continuous ability to meet critical needs. Its breadth of offerings, leadership in key market segments, digital competencies, and new business opportunities will likely help TCS continue to gain market share, analysts believe; especially during a recession when clients look for partners who can accelerate digital transformation. Some of the service lines that are expected to benefit due to the new realities companies are faced with include a faster adoption of the cloud and digital workforce collaboration.

As far as digital workforce collaboration is concerned, TCS’s own operations are an example of how that can be implemented. According to TCS’s chief operating officer N. Ganapathy Subramaniam, shifting an organisation employing 448,000 employees to a “location-independent agile model” in a matter of days led the company to push boundaries to achieve seamless operations.

“The outcome was our Secure Borderless Workspaces framework, which has now enabled close to 90% of our employees to work remotely and securely. Despite the lockdowns, I am pleased that our customers continue to experience the same energy and delivery certainty from TCS as before,” Subramaniam said. “All in all, we managed to not only maintain all essential services for our customers but also continue the journey in their growth and transformation programmes.”

The initiatives put in place to allow employees to deliver on projects real-time, without coming into office has helped strengthen customers’ confidence in TCS, Rajesh Gopinathan, the company’s CEO and MD, said.

Milind Lakkad, TCS’ global head of human resources, said that he expected employees to spend only 25% of their time in office by 2025. On a happy note, TCS has decided to honour all commitments for campus recruitments made for FY21 (around 40,000). However, lateral hiring has been frozen for the time being and increments have been deferred.