TCS bets on BFSI, retail for double-digit growth after 3-year hiatus

Client additions, digital revenues, weak rupee should aid revenue growth

After a gap of three years, TCS is expected to hit double-digit growth in FY19. The firm, which is expected to end the fiscal year with a growth of 11-12 per cent, ticked all boxes in what is seasonally the strongest quarter for IT services. Led by strong growth in its two big verticals — banking, financial services and insurance (BFSI), and retail — which account for 48 per cent of revenues, the company posted 3.7 per cent constant currency growth on a sequential basis.

This was slightly lower than the 4 per cent most analysts had estimated, given the deal wins in Q4FY18 and the 4.1 per cent growth registered in Q1FY19. However, analysts believe all-round growth in most verticals, client additions across revenue buckets, uptick in hiring, and traction in digital revenues should reflect in the H2FY19 as well.

After recording 5 per cent and 14 per cent sequential growth in the first quarter, in the BFSI and retail sectors respectively, the company has improved this to 6.1 per cent and 15.6 per cent. Client addition, too, continues at a good pace with the company adding four new customers in the $100-million band, taking the total to 44.

What should keep the growth momentum strong is the traction the firm has received on the digital segment.

 This service area now accounts for 28 per cent of revenues, as compared to just under 20 per cent a year ago, and has grown at a strong 60 per cent YoY. 

Growth in digital is key to the sector’s growth, as this is growing much faster than the traditional legacy business, which still accounts for 70 per cent of TCS’ revenues. 

On the margin front, aided by strong revenue growth, rupee depreciation and operational efficiencies, the company posted margins in its targeted band of 26.5 per cent (at a seven-quarter high). Given the weak rupee, it is expected to trend higher, even when factoring in the increased employee count.

 The company has been adding significantly in preparation for the growth in the coming quarters, with its Q2 addition of over 10,000 associates being a nine-quarter high. 

While the company has delivered on most parameters and is sounding bullish about prospects, the stock may not see much of an upside given most of this is already captured in the valuations, currently at a 33 per cent premium to Infosys.