TCS’s digital bet starts to show results

Tata Consultancy Services (TCS), India’s largest information technology-services company, expectedly reported unimpressive December quarter earnings on Thursday. Its weak performance in the U.S. and drop in revenues from the banking and financial space—the largest market and vertical for the company—are causes for concern. Yet there is a silver lining—TCS’s bet on digital business appears to be paying off.

The revenue from its digital business grew to $1 billion in the quarter. The surge in revenue from clients in continental Europe and from the retail vertical too would please investors. But the digital business was possibly the most significant uplifter as the company announced a $50 million-plus deal in the third quarter of FY18. It didn’t reveal further details, however.

“Key positives for the quarter were: strong digital performance with digital business crossing $1 billion quarterly revenue mark and a large digital deal win, rebound in the retail and CPG (consumer packaged goods) vertical which grew 6.4% quarter-on-quarter, large deal wins and steady client metrics,” HDFC Securities noted in its report on TCS earnings.

In the digital business, cloud-computing services led the growth, accounting for 22 deals in the quarter. In total, TCS won over 150 digital business deals in the quarter.

Over the last few years, Mumbai-headquartered TCS has sharpened its focus in the emerging digital business, which would span newer technologies such as artificial intelligence (AI), analytics, mobility, the Internet of Things (IoT) and cloud computing.

“The investments we have been making over the last few years in research and innovation, and in building intellectual property, are giving us a distinct edge in the market in winning such large transformational programmes.” Rajesh Gopinathan, CEO and managing director, TCS, said.

Gopinathan indicated that the deal pipeline continues to be strong across business verticals for the coming quarters, but did not give a vertical-wise breakup.

But the numbers are stark. The digital business accounted for 22.1% of TCS’s total revenue in the quarter—a 13.9% increase sequentially (quarter-on-quarter) and 39.6% year-on-year (y-o-y) in constant currency terms. A year ago, the digital business contributed 16.8% to TCS’s overall revenue. IT-services companies use the constant currency method to eliminate the effects of exchange rate fluctuations while calculating the results.

“New deal ramp-ups, increasing traction in digital, robust demand pick up in retail and continuing momentum in most of our industry verticals gave us strong volume growth in a seasonally weak quarter,” said N. Ganapathy Subramaniam, chief operating officer and executive director, TCS.

To be clear, TCS is not alone in strengthening the digital business—Infosys and Wipro, too, are ramping up their digital businesses as clients push for more transformative services than just cost-savings outsourcing deals. Yet, digital business accounts for less than a fourth of overall revenue of the Indian IT-services companies.

TCS also reported good performance in continental Europe, which contributes 11.1% of the total revenue. The revenue from the region saw a 2.6% constant currency rise.

TCS posted a 1% sequential rise in dollar revenue growth to $4.79 billion during the December quarter. Profit stood at $1.01 billion, a 1.2% rise year-on-year and 1.1% increase sequentially.