TCS Sees The World As ‘A Different Place’ Coming Out Of The Pandemic

From aligning itself to evolving priorities to staying lean and nimble. From finding newer ways to create value to launching offerings that address current imperatives. India's biggest information technology company bets on these themes as it aims to rebound and take advantage of opportunities that come up after the world emerges from the Covid-19 crisis.

Products and services requested by clients and the way they are delivered will change by the time the world comes out of the crisis, Tata Consultancy Services Ltd. said in its annual report for 2019-20.

The novel virus outbreak upended economies worldwide as it stalled trade. The software service providers—that generate most of their business overseas—witnessed loss of billings due to the lockdowns to prevent the disease from spreading. While some Indian tech firms temporarily suspended their guidance for the fiscal ending March 2021, TCS expects its full-year revenue to remain muted amid the disruptions.

Here are the key takeaways from TCS' annual report:

Change In Type Services Demanded

Global lockdowns and large employee bases in organisations working from home have accelerated the adoption of digital services.

In many sectors, digital channels have gone from being “secondary, nice-to-have options” to “primary channels”, and in some instances, the “only channels”, N Chandrasekaran, chairman of Tata Group, said in the annual report.

“With cloud and new class of collaboration tools, people are discovering that they are able to collaborate with each other just as well working from home, as they did in person in the pre-Covid era,” he said. The large shift in consumer preferences, according to Chandrasekaran, will force enterprises to accelerate their digital transformation initiatives.

Change In Delivery Medium

The pandemic is also changing the way TCS operates.

The company's “secure borderless workspaces model” aided its network management and project delivery environment and pushed for heavy use of digital collaboration tools, said Chief Executive Officer and Managing Director Rajesh Gopinathan.

The model allows TCS associates to work remotely from homes, while continuing to provide uninterrupted support services to customers. The model also forms a part of the project management framework, indicating it allocates, governs and reports work among employees, while maintaining stringent security controls.

TCS targets that by 2025 only 25% of its associates will need to work out of its facilities at any point in time. “Every associate will be able to realise their potential without spending more than 25% of their time in a TCS office”.

According to Kotak Institutional Equities, the secure borderless workspaces model represents a new location-agnostic operating model. “The virtualisation, where interactions between TCS and client teams are done virtually, blurs the traditional divide between onsite and offshore, reducing the need to travel to onsite locations, particularly for initial transitions and knowledge transfer,” the research house said in a report.

Financial Outlook

Gopinathan said the new fiscal will be challenging for individuals and organizations as global economies have been brought to a standstill.

The issues, however, are not related to the information technology industry but due to “an externality that has hit the pause button on all economic activity, he said. “Whenever that externality is removed, an equally quick recovery should follow.”

TCS doesn't provide financial guidance but expects normalcy to return only in the quarter ending December 2020. A consensus of analysts tracked by Bloomberg expects a muted year for the company.

Yet, TCS may be able to maintain its operating margins.

There are multiple options TCS can leverage should it face pressure in maintaining costs, according to Chief Financial Officer V Ramakrishnan. The company already operates through individual business units were heads take decisions on costs. Selling more high-value services and solutions, selling managed service contracts and replacing subcontractors with employees are few areas where TCS can maintain its operating margins.

Large Deals Led By Flagship Platforms

The total order book of TCS stood at $8.9 billion as of March 2020. Ramakrishnan said at least one large multi-million-dollar deal was signed while both parties were under lockdown at the end of March.

A lot of these orders will use some of the company's most well-known product and platforms led by TCS BaNCS (core banking software), Ignio (software to drive digital transformation) and Mastercraft (optimises IT service delivery).

“Ramp-ups on some of the large deals we signed in the fourth quarter are progressing smoothly,” said Milind Lakkad, global head of human resources, at TCS.

Cash Flows And Capital Allocation

TCS generated free cash flows worth $4.97 billion in the financial year ended March 2020. The company's shareholder payout ratio stood at 109% of free cash flows.

According to Kotak Institutional Equities, the company is efficient on use of capital and does not overspend on capital expenditure. TCS has returned more than 100% of free cash flows to shareholders in the past three years. It has done well to invest steadily in businesses, while maintaining judicious use of cash, the research house said.

CFO Ramakrishnan said the company has sufficient cash on its balance sheet for the “proverbial rainy day”. “So, our capital allocation policy continues to be one of returning most of our free cash flows to shareholders,” he said.

The company, Ramakrishnan said, is always open to the idea of picking up the right asset at the right price. “Economic downturns are probably the best time to do it, when there are fewer buyers.”