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Tata Consultancy Services (TCS) recently published its Q3 2023 results, wherein the tech giant recorded a decline of nearly 2% in revenue growth in constant currency terms (i.e., exchange rate used to eliminate fluctuations when calculating the financial performance numbers) when compared to the previous quarter. From 15.4% in Q2 2023, TCS’ revenue growth decreased to 13.5% in Q3 2023 in CC value. Additionally, the company also witnessed a quarterly decline of around 2,200 employees in the total headcount, with a de-growth of 3.7% in deal bookings to $7.8 billion.
Several analysts claim that when one considers these statistics, a slowdown in the profitability of TCS in the near future is more or less inevitable.
Is the UK slowing down performance?
Fitch Ratings, one of the top three credit rating agencies internationally, expects that TCS’ revenue growth will slow down to 11–12% in FY24, recording around a 6% decline. According to the agency, the expected revenue growth for TCS in FY23 is around 18%. However, since there is a looming fear of recession in the UK and Europe, experts believe that the growth in this particular sector is likely to be impeded for TCS, who have a dominant market presence in these geographies.
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As per the latest forecast by the Bank of England, the UK economy is on the path to falling into a recession that is expected to last at least until the end of next year. However, even amid worsening situations, TCS chief Rajesh Gopinathan remains optimistic. While releasing the Q3 results, he said that the UK’s decision-making is faster than other nations. According to him, “Customers are very clear, and a lot of action is happening in the UK”.
Commenting on Europe, Rajesh Gopinathan said that, “Europe’s decision-making has significantly slowed down”. He believes that Europe will be a cautionary tale for TCS this year compared to last year.
Gopinathan, while addressing the competitive intensity during presenting Q3 results, also commented upon the deal structures and explained that since they are complex, it’ll narrow down the field to a much-limited set of competitors.
However, the numbers reflect otherwise. In the third quarter of FY23, TCS received new orders worth $7.6 billion, which, compared to the previous quarter ($8.1 billion), declined by 3.7%. The book-to-bill ratio, which is the ratio of orders received to units shipped and billed for a particular period, also declined to 1.07x in Q3 2023. In Q3 2022, it was around 1.17x while the historical average since Q1 2019 is around 1.24x.
A book-to-bill ratio above 1 means more orders were received than filled while a ratio below 1 means more orders were shipped than received during a particular period. In TCS’ case, the ratio is declining, thereby indicating signs of an impending slowdown.
As per Jefferies, an American independent investment bank, “Falling employee headcount and book-to-bill ratio point to sharp growth moderation in FY24”.
Additionally, the bank expects TCS to deliver constant currency revenue CAGR (compound annual growth rate) of 7.5% over FY 23-25, “much slower than the 14% YoY expected in FY23”.
TCS growth in the long term?
TCS might have shown signs of a slowdown in the near future. However, the overall growth for upcoming years might not be affected anytime soon. With an order book of $7 billion in Q3 2023 and a strong deal backlog of $35 billion in the last 12 months, TCS is relatively safer than other companies working in the same sector.
Motilal Oswal says, “TCS, with its order book and exposure to long-duration orders, is well-positioned to withstand the weakening macro environment”.