TCS back on double-digit growth path led by rebound in BFSI vertical

The BFSI vertical, which accounts for 31% of the company's revenues, has been a laggard, pulling down the overall growth of the company over the last couple of years

Led by a revival in the banking financial services and insurance (BFSI) vertical TCS is expected to post double-digit growth in FY19. The company’s annual revenue growth, which has been trending down from FY12 onwards, hit the trough in FY18 with a growth of 4.4 per cent. Financial year FY19 would be the first time in three years that the company will get back to the double-digit growth mark. 

The BFSI vertical, which accounts for 31 per cent of the company’s revenues, has been a laggard, pulling down the overall growth of the company over the last couple of years.

The vertical grew 3.7 per cent sequentially on a constant currency basis in the June quarter, compared to just 0.4 per cent in the March quarter.

However, going ahead with gains across geographies as well as within the BFSI space, be it in banking or insurance, analysts expect it to outperform its peers in this segment. Says an analyst, “There has been recovery in segments such as insurance, which have been responsible for dragging down the BFSI performance, but that seems to have turned around. Growth has been strong not only in the US, but also in the UK and Europe.”

With spending environment improving, banks that have been cutting costs by meeting their IT needs through their own captive centres have started to offer incremental contracts to companies such as TCS, since their own centres lack the advance capabilities. The reversal of this trend has helped improve the revenue streams from the BFSI segment.

Given the large order wins, analysts expect TCS to gain market share in this segment.

On the digital front, with $4-$5 billion of annualised revenues, analysts believe that the company is ahead of peers and should be able to maintain the momentum registered in the June quarter. The digital segment, which now accounts for 25 per cent of revenues, grew 45 per cent year on year in the quarter. The digital capabilities is helping TCS win higher share of non request for proposal deals, which will not only mean strong revenue addition, but is also positive for the company’s margins. 

With digital revenues growing at 40 per cent even if the legacy business that accounts for 75 per cent of sales register a flat growth trajectory, the company will be able to grow its overall business at over 10 per cent over the next two financial years. Further, the total contract value at around $5 billion indicates a health revenue outlook at least for the next couple of quarters, according to an analyst. 

Though the growth trajectory is strong, the stock trades at a record 60 per cent premium to the IT peer average and over 30 per cent to Infosys.

While the gap is unlikely to widen, the company is expected to maintain premium valuations going ahead.