TCS’s return to double-digit growth is old hat, but also commendable
TCS has grown about 20% in size compared to about two years ago, when it had last grown in double digits
Tata Consultancy Services Ltd (TCS) reported a return to double-digit revenue growth after two years. Revenues grew 11.5% in the September quarter in constant currency terms, far higher than the 6.2% growth the company had reported just three quarters ago. True, the low base from last year has helped growth rates look better this year. And a pickup in growth rates has been priced in by investors for over nine months now; as far as investors go, it’s almost last year’s news. Even so, the sharp pickup in growth is commendable. TCS has grown about 20% in size compared to about two years ago, when it had last grown in double digits.
Needless to say, incremental revenues need to be much higher now to support the same level of growth. Besides, none of the company’s competitors based in India have reported a similar acceleration in growth.
Of course, the big question is if growth rates will sustain. The company has said that it will end fiscal year 2019 (FY19) with double-digit growth, breaking the tradition of the last few years of not providing any guidance.
But that’s nothing to celebrate. Even if the company grew revenues by just 1% in each of the next two quarters, it will end up with revenue growth of 10% in FY19 in constant currency.
What really counts is if growth rates sustain at last quarter’s levels of 11-12% at least until next year. According to an analyst at a multinational brokerage firm, growth this year is being driven by very large platform deals TCS had won in FY18, and it seems like the company hasn’t won similar deals so far in FY19. As such, it remains to be seen if growth rates will sustain.
Note that despite the 12% correction in the share price, TCS still trades at more than 22 times estimated earnings for the 12 months till September 2019.
And even though last quarter’s revenue growth stood at a 10-quarter high, and margins reached a 14-quarter high thanks to the depreciation in the rupee, net profit growth stood at 22.5%.
Earnings growth rates are expected to fall within a few quarters, since gains from the weaker rupee are typically reinvested in the business through pricing discounts or increased sales and marketing expenses.
So it’s imperative that revenue growth rates sustain to justify the faith of investors. That may well be a tall order for TCS, which is already firing on all cylinders, with growth having picked up in all of the verticals it operates in. But just because investors have run ahead of themselves doesn’t mean that the company hasn’t been doing well.
Editor's Picks »
- Does Reliance Jio see need to deleverage?
- 4 years since Senvion sale, turnaround continues to elude Suzlon
- Falling fuel prices, new axle norms to help cement makers save freight cost
- Tailwinds of debt reduction and annuity sales drive DLF’s shares
- Expecting a quick recovery in rural consumption will be foolhardy