Organic focus cause of concern for TCS
IT major seems more positive on niche acquisitions
Tata Consultancy Services (TCS) beat Street estimates with a 16 per cent revenue jump and 21 per cent profit growth over the year in the June quarter, much in line with the positive numbers that global rival Accenture announced a week before.
However, analyst have noted the big difference in digital revenues. While Accenture reported 60 per cent of its total revenue came from this segment ($6.8 billion), aided by their strong focus on acquisitions over the past three years, TCS has remained equally stubborn on an organic growth path, yielding 25 per cent of its overall revenues from digital. On a much higher base, Accenture's digital business, including cloud and security services, grew in high double-digits, above the company’s average growth rate.
TCS’ digital revenues on a smaller base grew almost 9 per cent over the earlier quarter in constant currency terms. Going by the management commentary, much of this growth came from existing clients. This indicates the company is deriving more add-on revenues in digital rather than playing a pure-play digital role that sector watchers have been seeking.
“(Digital) has a role in terms of new client acquisition but, by and large, a lot of the digital revenue we see is coming from our existing customers and our participation in their digital investments, rather than this revenue coming from a new set of customers,” chief executive officer Rajesh Gopinathan said during an analysts' call late Tuesday.
“Somewhere down the line, this organic focus conveys the sentiment that there are fewer variations in service available from the company and that might affect customer sentiment, if not investors,” said a leading analyst at a global research entity, requesting anonymity.
Among the peer group, TCS continues to lead the organic growth table. However, a look at Accenture’s performance in the past accounting year shows the series of buys it had done in past years was a significant contribution to its double-digits growth.
During 2017-18, Accenture increased its revenue growth forecast range for a third time, to 9.510 per cent. At the end of the final quarter of FY17, it had initially said it expected growth of 5-8 per cent for FY18 which it revised to 68 per cent after the first quarter, and again to 7-9 per cent at the end of the second one. “Of this (revised guidance of 9.5-10 per cent) growth, 250 basis points will come from acquisitions (50 bps higher than previous years), indicating organic growth of 7-7.5 per cent, which is strong, given its size,” said Nirmal Bang analyst Girish Pai in a recent report.
He noted a lot of incremental growth for Accenture in recent years had come from new areas, avoiding direct confrontation with price-competitive Indiabased players. In the past three years, Accenture has spent at least $3.4 billion on mergers and acquisitions, almost half of which was in 2017. The majority of the 70-odd acquisitions the NYSElisted company has made are focused on digital and cloudrelated businesses.