Despite posting a good set of numbers during the January-March quarter, analysts maintain that weak discretionary demand will remain a pain point for TCS with clients continuing to prioritise cost saving projects, thereby leaving limited near-term growth visibility for the company.
During the quarter, cost optimisation deal comprised almost 55-60% of the total deals, with the rest being transformation deals. In IT, cost optimisation deals refer to the ones aimed at reducing operational expenses and usually points towards issues in acquiring new clients.
The demand in its largest geography, the US, remains subdued, while the second largest market UK, saw somewhat expedited decision-making. However, uncertainties persist in the European market, humbling short-term expectations.
“The management outlook on the spending environment in IT services remains unchanged, despite some initial signs of pent-up demand, with a continued pause expected in discretionary deals in the near term,” said brokerage Motilal Oswal Financial Services in its post-earnings note.
A recent report showed that the impact of macroeconomic slowdown, will extend till the fiscal year 2025.
Earlier, management and analysts were anticipating full-blown green shoots to appear from financial year 2024-25. However, that appears bleak now with the management itself sounding cautious. “I don’t want to hazard a guess and say that growth would be returning in Q1 or Q2, it will be calling in too soon,” TCS CEO K Krithivasan said on Friday.
Moreover, its largest vertical, banking, financial services, and insurance (BFSI) along with other key vericals such as technology and telecom, declined on a year-over-year basis.
While TCS foresees potential growth rebounds in the US and banking sectors, the exact magnitude and pace of recovery remain uncertain. “The US and banking should start to grow soon, according to management, but the quantum and pace of the pickup wasn’t clear,” said HSBC Global Research in a note.
TCS acknowledges that potential pent-up demand may come back once macroeconomic uncertainties abate, and it continues to struggle with cautious client investments. Clients are handing over projects to the company expecting high returns on investment (RoI), a trend seen in most IT companies. “It (demand recovery) depends on the individual customer and wherever they see that there is a greater confidence of their business, you would see the pent-up demand also being satisfied. Again, it is a factor of what is the return on investment that particular investment will give them,” Krithivasan said while addressing analysts on Friday.
Nonetheless, it’s not all dull and gloomy for the company, which anticipates a potential uptick in decision-making around IT expenditures as the macroeconomic landscape stabilises. With demand for emerging technologies such as Generative AI, Machine Learning, Digital, and Cloud transformations resilient even amidst economic headwinds.