How TCS managed slowest revenue growth rate

Tata Consultancy Services (TCS) has reported its softest quarter of growth since Q3 2009, indicative of weakened demand in the North American BFSI market, while margins improve via automation and consulting.

TCS reported its slowest annual growth rate since 3Q09, up just 5.2 percent year-to-year and flat sequentially to $4.37 billion. Headwinds were fairly broad-based, noting slow growth in a number of regions, including the U.K. and India. That said, representing more than 40 percent of total revenue, a modest 5 percent year-to-year growth in aggregate BFSI revenue was a primary driver in limiting top-line growth, particularly in North America, says Ryan Blanchard, research analyst at TBR.

Despite weakened top-line growth, TCS generated sequential margin improvement during the quarter, posting an 80 basis point boost in operating margin to 26 percent. TBR attributes the improved profitability to investments in automation and the company’s transition upmarket with a greater portion of consulting-heavy engagements. During TCS’ earnings call, company executives noted continued traction around digital technology adoption, as clients remain dedicated to modernizing their critical IT infrastructures through the implementation of analytics-driven cloud and Internet of Things solutions. We believe adoption of the company’s digital portfolio will ramp up in 4Q16, helping support a top-line rebound in the range of 7.5 percent to 8.5 percent year-to-year.

TCS is offsetting slowing growth in North America and headwinds in the U.K. by expanding into underexposed markets such as LATAM and Japan

During 3Q16 TCS cautioned slower-than-usual growth as clients reduce discretionary spend in its core North American market. Spending reductions have been fairly consistent throughout the year, and have been noted industry-wide by a number of TCS’ India-based peers, including Infosys and Wipro. Additionally, TCS has noted stiff headwinds in the U.K. retail market, which drove an 11.4 percent annual decline from the region in the quarter. To offset these pressures, TCS has made a concerted effort to expand its wallet share in underexposed markets, including Continental Europe, APAC and Latin America (LATAM), all of which grew by double-digits during the quarter (15 percent, 14.2 percent and 16.9 percent, respectively). In 1HFY17 TCS has formed a number of alliances, which we believe are benefiting these regions, including its engagement with Siemens to codeliver analytics-driven solutions to global manufacturing clients.

Digital transformations continue to drive broad-based growth for TCS despite slowing discretionary spending and a relatively weak consulting bench

IT Solutions and Services (ITS&S) rose 3.3 percent on an annual basis to $2.7 billion in 3Q16. TCS’ extensive roster of technology partners broadens its addressable market when pursuing ITS&S engagements. A vendor-agnostic approach allows TCS to offer clients a host of options to address their specific business needs. The company has generated strong traction within its assurance services portfolio, including its MasterCraft product suite.

Engineering & Industrial Services (EIS) revenue grew 12.3 percent year-to-year during the quarter to $210 million, supported by the adoption of point solutions codeveloped with technology partners, such as the alliance with General Electric to create applications on the Predix platform. TCS is more than halfway to its goal of training 1,000 consultants on the GE Predix platform to capitalize on demand for analytics-driven solutions to streamline manufacturing processes.

TCS’ Asset Leverage Solutions (ALS) service line fell 14.5 percent to $114 million in 3Q16, largely due to weak adoption of its BaNCS solution as capital market clients, particularly in North America, limited discretionary spend on digital modernizations during the quarter.

Ryan Blanchard, research analyst at TBR