 "N Chandrasekaran")
Shares of the country's largest information technology services company, Tata Consultancy Services, reached their highest in three months on March 18, a day after the company, in an analysts' meet, announced its plans to step up its digital play to shore up revenues.
It said in addition to the traditional focus on automating supply chains, payrolls and so forth, cloud computing, analytics and digitising business processes will become more important in its plans in the future.
While TCS's digital play has been a story in the making for some time now, a big reason for the cheer among investors was hidden in the symbolism of the March 18 event. "After a gap of seven to eight years, the company had its top management present there," says an analyst who attended the meeting.
Usually, TCS's quarterly updates are routine affairs led by the company's chief financial officer and the analyst relation officer but this time it was Chief Executive N Chandrasekaran himself leading the charge. He sat there for the whole duration of the meeting, explaining the company's strategy and fielding questions, says the analyst.
To many, this was an attempt by TCS to highlight to the street that it was placing digital right at the centre of its growth strategy. It was also meant to send out the message that while revenues from traditional annuity-based services were slowing, TCS was at the same time opening new channels of growth.
There is no doubt growth has slacked off in recent times. TCS has missed analysts' expectations for six consecutive quarters in the face of rising competition and the slowing IT market globally. It hopes the focus on digital will help it close this gap and create a much-needed source of revenue.
Globally, this is a growth area with companies looking to use digital to run their marketing and sales campaigns and to integrate their business processes. The demand in the field of cloud computing that allows companies to update their software with paid subscription without the need for maintaining huge data centres is also growing rapidly. It only makes sense for TCS to tap these opportunities.
In-house focus
However, unlike Infosys, Wipro and Congnizant, which have taken the inorganic route to bolster their digital capabilities, TCS has been building its digital business far from the public eye in a piecemeal manner. At the analyst meet, it said that even though it may not have taken the acquisition-route to growth, it is better placed than rivals to capture international deals in the segment.
The analysts went back impressed. "We returned from the investor day with greater confidence about the company's digital and automation strategy," said an Ambit report after the meet.
Another report, this time from Kotak Institutional Equities, said, "We believe that TCS has done hard work and the building blocks are in place to sustain/extend leadership. It is creditable that TCS made these investments without compromising on profitability."
Over the past few years, TCS has invested heavily, although it has not revealed how much, in creating next-gen delivery models and technology products. It has also collaborated with over 1,400 start-ups focused on creating digital models of doing business to keep up with the latest in technology. A lot of effort has also been made in training over 111,000 associates in digital tools and platforms.
The digital piece seems to have already gathered momentum. "There has been significant growth in some digital-related services: analytics and insights grew 10 per cent CQGR (compounded quarterly growth rate) over 1QFY15 to 3QFY16, cloud grew 12 per cent CQGR, and mobility/channels grew 8 per cent CQGR," says Chandrasekaran.
This demand is only expected to grow in the future. For TCS today, the share of digital is about 24 per cent of revenues in media, 19 per cent in retail, 16 per cent in hi-tech and travel, 15 per cent in life sciences, and 12 per cent in banking and financial services.
Chandrasekaran said in addition to adding new clients, about 52 per cent of this demand has been from its existing clients.
Old businesses take lead
However, while the demand for digital has been coming from everywhere, many believe it may not be enough to meet the shortfall in the revenues from the company's traditional businesses. Digital only accounts for 13 per cent of its overall revenues today.
"Though digital may be growing, it is also a fact that it is becoming difficult for companies to add the kind of revenue they could add when traditional business was growing," adds another analyst from a global brokerage firm on the condition of anonymity.
"For TCS to grow in double digits on its current base, it needs to add $1.6 billion revenues annually - a herculean task for any company. Given the persistent weakness in its telecom, insurance, and E&U verticals (25 per cent of revenues), we expect TCS to fail to achieve double-digit growth in FY17 and beyond," points out a report from PhillipCapital.
TCS's leadership position in traditional businesses was largely due its early-mover advantage. It built capabilities in verticals and geographies which had not caught the eye of its peers.
However, analysts say, over the past three to four years, others have also stepped up investments in building automation tools, deepening vertical capabilities and expanding geographic reach, organically as well as inorganically. This had led to its growth getting restricted.
"Its industry-leading EBIT margin (26-27 per cent) and its high RoIC (60-70 per cent) makes it vulnerable to competitive situations with players who work with lower margin (20-22 per cent) and RoIC profiles (30-35 per cent)," says a report from Nirmal Bang Institutional Equities.
However, on one metric TCS is still ahead of its competitors. For CY15 it had 34 clients in the $100 million category, 65 in $50 million segment and 173 in $20-25 million and 281 in the $10 million bracket. The incremental addition of clients in these segments over CY14 was nine ($100 million), 14 ($20-25 million) and 32 ($10 million).
In comparison, Infosys and Wipro's incremental addition saw a drop of one client each in the $100 million segment. Infosys added five clients in the $50 million, six in the $20-25 million, and 17 in $10 million bracket. But even as TCS is able to add new clients in traditional business, it is digital where the future is.
