TCS Warns of US Tech Spending Weakness After Earnings Disappoint

TCS Warns of US Tech Spending Weakness After Earnings Disappoint

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(Bloomberg) — Tata Consultancy Services Ltd.’s second-quarter profit narrowly missed street estimates, underscoring how worries about an economic slowdown continue to curtail tech spending.

Net income rose 8.7% to 113.4 billion rupees ($1.4 billion) in the quarter through September. Analysts, on average, had projected a profit of 114.09 billion rupees. Sales climbed 7.9% to 596.9 billion rupees. Shares of TCS declined 1.7% in early Mumbai trading.

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TCS leads India’s $245 billion-plus IT services industry, which is bracing for a slowdown as enterprises in the US and beyond cut back on technology to cope with high interest rates and inflation. Russia’s continued war on Ukraine has also created economic uncertainty for businesses. Like homegrown rival Infosys Ltd., TCS is also trying to fuel growth through higher-margin digital services.

“The demand environment is under pressure in the US market,” Chief Operating Officer N Ganapathy Subramaniam said in an interview on Bloomberg TV. “In this quarter, we’ve signed about $4 billion worth of deals in North America, which is a tad low.”

Customers are starting projects that will deliver visible results within one or two quarters, while postponing longer ones, Subramaniam said.

What Bloomberg Intelligence Says

Pressure on Tata Consultancy Services’ sales growth is likely to stay muted in 2H, as companies keep cutting discretionary IT spending, despite a ramp-up in new contract activity. Though the book-to-bill ratio improved to 1.6x vs. 1.4x in the past two quarters, we’re not projecting a recovery in sales growth in the near term. On the positive side, TCS will likely benefit from an increase in vendor consolidation and cost optimization in 2H, which could further improve its total bookings.

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– Anurag Rana, analyst

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“IT industry growth has moderated and till there’s a certainty on the global economic outlook this moderation will continue because many of the customers will try to conserve cash for a difficult period ahead, if they expect a difficult period,” TCS Chief Executive Officer K Krithivasan said at a news conference in Mumbai on Wednesday. “Once that certainty comes in you’d see growth also. So whether it’s going to be difficult for IT companies specifically is a function of the war or global economic situation.”

Separately, TCS approved a buyback of shares worth up to 170 billion rupees.

CEO Krithivasan in June revamped the Mumbai-headquartered company’s structure, seeking to win higher margins from services such as artificial intelligence and cloud computing. Krithivasan took over as CEO after his predecessor resigned earlier this year.

The company has aligned itself along seven business groups that cover sectors from banking, financial and insurance industries to health care, energy and retail.

Read more: TCS Revamps Organization Structure to Leverage Domain Knowledge

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