Don’t see footprint of recession on demand: TCS

IT bellwether Tata Consultancy Services (TCS), which kicked off the sectoral earnings season on Friday, said that demand for technology remains ‘robust’ and the company has not seen any ‘immediate footprint’ of the recession on the demand side. “We are seeing steady demand from our immediate conversations with the customers..all projects that are currently going on, the pipeline conversions..all of that indicates a very steady demand environment. We are constantly polling to see if there are any early indications of softening and as of now, there is nothing. Into the middle of the year, we have been fairly very close to our customers and they seem to be very, very focused and no indication is immediately available,” chief executive officer and managing director Rajesh Gopinathan said in a media conference post the release of the company's Q1FY23 earnings.

The comments come at a time when a disturbing mix of a slowdown in global economic growth and soaring inflation have sparked fears of a recession. The global economy had barely started limping back to normalcy from a two-year Covid-led disruption when the Russia-Ukraine war that so far shows no signs of easing, upset the process, hurting global supply chains, and triggering a commodity crisis. Inflation in markets like the U.S. which drives the bulk of the business for Indian IT firms is at over a 40-year high.

“There is an increasing discussion about the recession. We don’t see any immediate footprint of it on our demand side. The pipeline build is quite strong and so is the nature of deals. On an immediate basis, the demand continues to be very strong,” Gopinathan said.

Commenting on the company’s Q1 results, Gopinathan said that the quarter saw a ‘steady’ performance, “continuing and consolidating our growth journey.” The firm’s TCV (total contract value) for the April-June quarter stood at $8.2 billion. The order book comprised a couple of sizeable deals pegged at some $400 million and a host of small and mid-sized deals. “Continuing client conversations also indicate that demand for technology is very robust and the demand drivers are very similar to the key themes that we have been talking about in the past—primarily driven by the cloud transition,” said Gopinathan.

TCS reported a 5.2% year-on-year growth in consolidated net profit at ₹9,478 crore for the quarter ending June 30, 2022. Revenue from operations rose 16.2% YoY to ₹52,758 crore during Q1FY23 from Revenues stood at ₹45,411 crore during the year-ago period. TCS’ count of clients in the more than $100 million bands grew by nine on a YoY basis, growing to 59 clients in the quarter.

“From our client interactions, we don't see any slowdown in demand or they are reprioritising the projects or putting budgets from one bucket to the other. We don’t see any of this happening. Based on the inputs we got from our customers, we are reasonably comfortable that at least in the near-term, for this financial year, I don't think they are looking at doing any of this right now,” reiterated chief operating officer and executive director N Ganapathy Subramaniam.

The company’s margins got impacted during the quarter on the back of annual wage increases and promotions. “Typically, in Q1 we see an impact on margins since we give out full cycle increments. These are across the board, not split across quarters,” said chief financial officer Samir Seksaria. The operating margin stood at 23.1% during the quarter, a contraction of 2.4% yoy. “This is the quarter where we do our annual wage increases and promotions..and the total impact of that on our P&L is about 150 basis points,” said Gopinathan.

Attrition rates for TCS remained high at 19.7%. Gopinathan said that there is a bit of seasonality attached to the quarter’s attrition mix given that a lot of junior employees typically leave for higher studies or other related concerns. However, attrition has not yet flattened. “On an absolute basis, it is continuing to increase though on a percentage basis, it is starting to flatten. We expect this to continue in parts of Q2 also and it is in H2 when we will start seeing some amount of more meaningful moderation of it. This is our short term view on attrition. From a medium to long-term perspective, both the supply as well as the demand side is easing up in terms of talent coming from outside of the immediate industry system and that should play into moderation of the attrition side,” said Gopinathan.

The current macro-economic conditions will not deter IT demand in the second half of the year, says Naveen Mishra, senior director analyst at Gartner. The firm expects end-user spending on IT services to grow 6.2% in 2022. “The confidence in IT investments will continue as CIOs will continue to invest in their multi-year digital transformation initiatives. TCS’ results strongly reflect strong growth for high-value consulting services, cloud and edge services, application Implementation and managed services as compared to other low value services such as infrastructure,” says Mishra.