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TCS pitches digital message as revenue growth numbers miss expectations

Stuart Lauchlan Profile picture for user slauchlan October 13, 2015
Summary:
Digital growth is doing nicely for TCS, but is it at the cost of more traditional revenue streams? CEO N Chandrasekaran isn't worrying about cannibalization.

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N Chandrasekaran

Tata Consultancy Services (TCS), India’s largest IT services provider, turned in higher profit but lower revenue growth than rival Infosys yesterday, but the revenue numbers missed analyst estimates for the fifth consecutive quarter, sending the firm’s share price down 4.5%.

For the quarter to end of September, TCS reported 14.5% growth in consolidated net profit to turn in Rs.6,055 crore ($926 million) against Rs.5,288 crore in the same period last year. Revenue was up to Rs.27,165 crore ($4.16 billion) from Rs.23,816 crore in the same period last year. Crucially that growth rate has fallen from 17.7% in the year-ago quarter to 5.8% today.

As is the form these days, the outsourcing giant is putting the focus firmly on its transformation into a digital services provider. Digital business grew 10.7% on a constant currency quarter-on-quarter basis and now accounts for 13.3% of overall revenues compared to 12.5% in the first quarter.

CEO N Chandrasekaran says:

Our ability to bring together our domain expertise, deep technology capabilities and unique understanding of the customers’ business contacts to create digital solutions in helping them to transform their business is positioning us very well.

We are seeing engagements which are of a different quality, it’s not about building mobile applications or building data platforms using big data, it is about end-to-end transformation of helping retailers transform from the supply chain oriented firms to customer insights based firms helping manufacturing companies to leverage with IOT and other data in order to leverage the insights coming from that ecosystem.

Similarly, we can talk about insurance, where telematics is playing a very important role, banking, where data lakes are becoming the norm.

The firm is putting investment into re-skilling its workforce to meet demand, he adds:

From a talent management perspective, we are significantly investing in digital training and we have committed to train 100% employees this year. And I’m glad that our Digital Learning platform has been successfully launched and already 30,000 employees have taken courses in this platform. And we are well on our way to complete our target.

Chandrasekaran says TCS is seeing some key trends in the market:

One is the simplification theme, where customers are moving away from the legacy IT footprint they have, whether it is in terms of infrastructure, whether it’s operations, whether it is applications. That is a transformation that happens into a cloud environment or into enterprise software environment etc, which are platform-based. There we stand to gain.

The second area is the digital area where the fresh investments are happening, albeit these investments may come from squeezing budget somewhere else, there I think that, there is a significant advantage TCS has, because of the investments we’ve made, whether it is in terms of trading talent or in terms of intellectual property platforms, automation in the form of ignioTM.

Defining digital

This is in part down to the way TCS defines digital, he argues:

All our digital is embedded in our industry units. That’s the way you should look at it. Two years ago most of the digital work would be in terms of building some applications in mobile or building a data platform and analytics application, and so on, and so forth. Currently we’re seeing serious embedding of all of this, in our work with clients, where we are helping customers transform into the digital world.

If you take a retailer, retailers used to be supply-chain-focused where they will focus on sourcing low and shipping most efficiently and pricing low. But now most of the retailers are transforming into totally consumer-insights based. So we are building platforms where we’re building knowledge around consumers, knowledge about inventory, knowledge about real-time pricing, about any particular item in the whole universe both online and become modern retailers.

And how do you use this kind of analytics and what are the various programs you run, whether you have channels, whether you have promotions, whether you have cross-selling, pricing - we are looking at a whole gamut of things based on the end-to-end transformation. Those are the kind of engagements we are now doing, whether be it retail, be it manufacturing, be it banking, be it travel.

In all this, Chandrasekaran says he is unconcerned at the prospect of the shift to digital cannibalizing traditional TCS revenue streams, despite 96% of business coming from existing customers:

I’m not concerned about any cannibalization or anything like that. Because at the end of the day when we are going from a legacy environment to a forward-looking environment, we will be the first person to do it and we want to participate in the upside of that transformation. So [we are] very proactive with customers, we’ve made all the investments in building the capabilities that are required, and frankly speaking this is not something that we are worried about.

My take

TCS got a bit of a bumpy ride on the markets, coming hot on the heels of Infosys numbers earlier in the week. The digital growth figures are encouraging, although the firm has yet to identify itself completely with digital services in the way that, for example, Accenture has. Chandrasekaran is saying all the right things, especially around embedding digital capabilities across the vertical industry units, but he may need to say them a lot more loudly and frequently in the months ahead.

Disclosure - at time of writing, Infosys is a premier partner of diginomica.

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