TCS comes down to earth

We shouldn't expect information technology to sparkle this fiscal year

Tata Consultancy Services, India’s leading software company, has posted disappointing results for both the March quarter and the financial year 2014-15.

Sequentially, that is, compared to the preceding quarter, it has for the first time in recent memory recorded a fall in revenue.

It began the year confidently asserting that ‘2014-15 will be much better than 2013-14’, but has ended up halving its revenue growth from almost 30 per cent to just over 15 per cent.

The decline is also reflected in net margins, down by over two percentage points to 21 per cent for the whole year, which is the lowest recorded in the last five years.

This is partly the result of an exceptional bonus payment to the staff -- but bonuses are a part of life in an industry where hanging on to staff is an issue.

It would, therefore, seem to herald the end of the high-growth pace that TCS had set over the last few years, highlighted by the sharp contrast with the results of Infosys, labouring as it was under a leadership problem.

It is not as if TCS faces any serious performance issues.

Its challenge in many ways is to deal with a phase of relatively low growth after having raised expectations by recording high growth rates for the last several years.

After all, if you maintain a scorching pace that the markets are happy to applaud, then things are likely to come down to earth sooner or later.

By addressing the staff morale issue with the special bonus and keeping pace with technology changes (it is happy with its performance on the digital front and has for the first time identified the size of its cloud business) it can hope to settle down to what its steady pace would be like.

The TCS results are probably a pointer to the subdued outlook before the software industry, a sentiment buttressed by the forecast of the research firm Gartner that global software services spending is likely to fall by a whisker in the current calendar year.

This is in line with the slowdown in the global economy beset by a fall in commodity prices.

Thus, the global economy is sluggish and the prospects for information technology services reflect it.

What is more, a technology shift is taking place that has to play itself out.

Since the turn of the century, the technology can has been carried by telecom and internet offerings.

These verticals, which are now sizeable for Indian information technology services companies, have now stabilised.

For overall information technology services to grow again at a fast pace, digital services have to keep growing the way they have and account for a larger share of the pie.

Indian firms are also burdened by their large portfolio of financial services business, which has remained in the doldrums ever since the crisis of 2008.

To all this has been added the waywardness of the Indian rupee, which has appreciated against currencies like Europe’s euro and Japan’s yen -- TCS sources around 40 per cent of its revenue from those countries.

The overall sense that investors are getting is that IT is all right -- but don’t expect it to sparkle this year.