Tata Consultancy Services (TCS), India’s leading IT services company, recently released its second-quarter earnings, reporting a net income increase of 8.7% to 113.4 billion rupees ($1.4 billion). While this marks a substantial growth, the figures narrowly missed analysts’ profit estimates, with projections averaging 114.09 billion rupees. Simultaneously, TCS reported a robust 7.9% growth in sales, totaling 596.9 billion rupees. Following the earnings release, TCS shares experienced a slight dip of 1.7% in early Mumbai trading.
TCS, at the forefront of India’s $245 billion-plus IT services industry, is confronting the headwinds of an economic slowdown as enterprises, both in the United States and worldwide, curtail technology investments in response to rising interest rates and inflation. Furthermore, the ongoing conflict in Ukraine, perpetuated by Russia, has further amplified economic uncertainties for businesses. In line with its domestic competitor Infosys Ltd., TCS is actively pivoting towards higher-margin digital services to sustain and fuel its growth trajectory.
In response to these market dynamics, N Ganapathy Subramaniam, TCS’s Chief Operating Officer, expressed, “The demand environment is under pressure in the US market,” during an interview on Bloomberg TV. “In this quarter, we’ve signed about $4 billion worth of deals in North America, which is a tad low.”
Customers are opting for projects that promise more immediate and visible results within one or two quarters, while deferring longer-term initiatives. TCS Chief Executive Officer K Krithivasan acknowledged the present industry slowdown and commented during a Mumbai news conference, “IT industry growth has moderated, and until there’s certainty on the global economic outlook, this moderation will persist because many customers are looking to conserve cash for a potentially challenging period ahead.”
The economic outlook for IT companies largely depends on the global economic situation and the ongoing conflicts. As Krithivasan explained, “Whether it’s going to be difficult for IT companies specifically is a function of the war or the global economic situation.”
Additionally, TCS’s Board of Directors approved a share buyback program worth up to 170 billion rupees.
CEO Krithivasan has been implementing changes within the Mumbai-headquartered company to capture higher margins, with a particular focus on services like artificial intelligence and cloud computing. TCS has undergone a structural transformation, aligning itself into seven business groups that span diverse sectors, ranging from banking, financial services, and insurance, to healthcare, energy, and retail.
Bloomberg Intelligence offered insights into the current market conditions, emphasizing that sales growth for TCS is expected to remain subdued in the second half of the year, as companies persist in reducing discretionary IT spending. While new contract activity has increased, the near-term outlook for sales growth remains restrained. However, TCS may gain from vendor consolidation and cost optimization in the latter part of the year, potentially improving its total bookings.
In summary, TCS, a stalwart in India’s IT services industry, continues to navigate the uncertainties of an economic slowdown and the challenges posed by global economic conditions, all while strategically positioning itself to capture opportunities in the digital services landscape.