1. Q4 margin drags, but Tata Consultancy upbeat on future. What is it betting on?

Q4 margin drags, but Tata Consultancy upbeat on future. What is it betting on?

Even as Tata Consultancy Services operating margin disappointed in the year gone by, the country’s largest information technology services company continues to be optimistic on achieving an operating margin of 26-28% in the new fiscal year 2017-18.

By: | Published: April 18, 2017 7:22 PM
TCS said it does not need to moderate its aspirational target of 26-28% operating margin. (Image: Reuters)

Even as Tata Consultancy Services operating margin disappointed in the year gone by, falling to 25.73% in the fiscal fourth quarter, the country’s largest information technology services company continues to be optimistic on achieving an operating margin of 26-28% in the new fiscal year 2017-18, riding on recovery in its largest business segment.

“We continue to see strong traction in BFSI (Banking, Financial Services, Insurance), and expect it to bounce back strongly, as we go forward into the next quarter,” TCS CEO Rajesh Gopinathan said at a press meet after the announcement of the company’s quarterly and full-year financial results.

“We are quite positive about BFSI. We are seeing continuing momentum in BFSI. Insurance continues to do well. There is a lot of pipeline of small projects. So the deal momentum is fairly high, but the project sizes are smaller and therefore some amount of that is translating into volatility in terms of QoQ numbers. Our customers are positive about the future, and have very strong investment agenda,” Gopinathan added.

TCS’ BFSI revenue fell 0.4% in the Jan-Mar quarter, which Gopinathan said, was due to the cyclical nature of this segment. “BFSI is moe a cyclical or a period to period change,” he said.

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However, the company expects its another business vertical – retail – to continue to be under pressure. “Retail is facing structural challenges in the industry,” Gopinathan said, adding, “Financial stress is building up on the (retail) industry.”

The company, driven by its focus and growth in the digital services, expects to continue its strong performance in the year ahead. “We see FY18 as incrementally positive, quite confident about the demand outlook that we see,” Gopinathan said. “We continue to stay focussed on three key themes within digital — agile, cloud and automation. We are focusing the company more tightly around these themes as we see these playing out,” he added.

Gopinathan said the company’s clients expect it to continue its strong focus on digital services. We spend first two months (of the new financial year 2017-18) visiting customers primarily across North America, and also across Europe and Asia-Pacific as well. Customers expect very strong focus on digital services, with continuing investments in that,” Gopinathan said, adding, that they also expect very strong focus on operations and efficiency – “which plays well into TCS’ core strength”.

TCS’ optimism is in slight contrast to its next biggest rival Infosys, which earlier last week offered a bleak outlook for the year ahead, guiding for an EBIT margin at 23%-25% for the current financial year 2017-18.

TCS said it does not need to moderate its aspirational target of 26-28% operating margin. “The 26-28% band is what we will focus on,” Chief Financial Officer V Ramakrishnan said, adding, “We are a tad short in this quarter and full financial year, but the focus is to get to 26% and to work in that band. We have several things which can work towards that.”

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