TCS Faces Challenging Fiscal Year May Grow In “Very Moderate Single Digits;” CEO K Krithivasan

Tata Consultancy Services (TCS) is entering a challenging fiscal year with the prospect of registering its slowest annual growth ever. 

In a recent interview, the new CEO, K Krithivasan, who took office in June, recently spoke about the company’s growth prospects and other key issues facing TCS. 

Moderate Single-Digit Growth

Krithivasan acknowledged that the first two quarters of the fiscal year have been “very muted,” and the next two quarters are expected to be seasonally weak for the entire IT services sector. 

Thus, it may result in TCS achieving growth in “very moderate single digits”; the slowdown in demand for IT services globally has had a significant impact on the company’s performance, and the CEO stressed that TCS is actively looking for opportunities to maximize its existing demand even in these challenging circumstances.

Market Focus and Restructuring

Krithivasan spoke about the company’s restructuring efforts to enhance its ability to effectively cater to different client verticals; the goal, he said, is to ensure that the best of TCS is available to clients, regardless of their size or relationship with the company. 

The restructuring process appears to be well-received both internally and by clients, as it allows TCS to offer more tailored services to its customer base. 

When explicitly asked about the restructuring process and if the internal resentment had been addressed, Krithivasan refuted claims of resentment among employees regarding the restructuring, emphasizing that it’s a positive move for the company.

Geo-Political Impact

Krithivasan addressed the Israel-Gaza conflict, recognizing it as a human tragedy before discussing the potential business implications. 

TCS, he stated, has focused on ensuring the safety of its associates and maintaining business continuity for its clients.

At the same time, while the direct impact on TCS’s business from the region is not substantial, geo-political conflicts like this can have a broader impact on global economics, including oil prices and inflation.

Shareholder Returns and Buybacks

The CEO explained TCS’s approach to returning value to shareholders; the company aims to return 80-100% of free cash flow to shareholders through a combination of dividends and share buybacks. 

TCS recently opted for a buyback due to regulatory restrictions, and it plans to alternate between dividends and buybacks to return money to shareholders in a way that complies with financial regulations.

Preferential Treatment Investigation

Krithivasan also provided an update on the investigation into preferential treatment given to recruitment firms by the TCS Recruitment Management Group (RMG). 

The investigation concluded with action taken against 19 employees for code of conduct violations; the company has also implemented processes to prevent reoccurrence, including role rotation and analytics to detect anomalies. 

TCS has about 20,000 of the contract staff (under RMG), which impacted less than 5% on a TCS base of over 600,000; thus, he highlighted that it was happening in a small case, and it didn’t have a significant financial impact on TCS.

The Viewpoint

Over the past few decades, India’s information technology (IT) industry has played a pivotal role in the country’s economic ascent with a workforce exceeding five million, India’s IT-BPM (business process management) sector contributed a substantial 7.4 per cent to the country’s Gross Domestic Product in 2022. 

Projections suggest an estimated compound annual growth rate (CAGR) of 11-14 per cent over the next five years, potentially propelling the industry to a staggering USD 350 billion valuation by 2026.

These impressive figures highlight India’s prowess in harnessing the global digital and communication revolution; nevertheless, the Indian IT sector faces a set of imminent risks and challenges, which the IT Industry Outlook 2023 report aims to address.

Challenges

The prevailing macroeconomic uncertainty in the United States and European Union nations has already triggered supply chain disruptions, shortages of raw materials, and concerns about semiconductor supplies. 

Additionally, geopolitical instabilities, trade tensions, and evolving regulations in international markets may influence outsourcing trends, potentially causing disruptions in the IT industry’s traditional revenue streams.

Furthermore, any unforeseen economic downturn or global crises could have repercussions on IT spending, potentially resulting in clients delaying or reducing their technology investments; already, higher interest rates have started to slow down the influx of new orders.

Looking ahead, India’s software services industry continues to exhibit robust growth in exports, underscoring its competitiveness and untapped potential for further development and innovation. 

However, the year 2023 poses challenges for the Indian IT sector due to escalating inflation, rising interest rates, and the ongoing Ukraine conflict. 

In spite of these obstacles, the industry is anticipated to maintain a robust growth trajectory, driven by persistent global demand from clients.

In 2023, the IT industry’s primary areas of expansion will revolve around digital transformation, cloud computing, cybersecurity, and artificial intelligence. These technologies have gained increasing significance for businesses of all scales, and the Indian IT sector is well-prepared to assist clients in implementing and harnessing these cutting-edge solutions. 

The Last Bit, 

As Tata Consultancy Services braces for a fiscal year marked by “very moderate single digits” growth, the company’s strategies, resilience, and adaptability take center stage. 

The IT industry’s dynamics and global challenges have required TCS to rethink its approach, leading to a company-wide restructuring that focuses on delivering the best of TCS to clients across verticals. 

Despite these challenges, TCS remains committed to delivering value to its shareholders, alternating between dividends and share buybacks to return value to investors. 

While uncertainties loom large, TCS’s approach and adaptability position it to continue being a key player in the global IT services arena; with the Indian Government actively investing in enhancing IT infrastructure, the domestic market also presents promising opportunities.