IT Giant TCS Beats Estimates After Covid Drives Digital Boom

(Bloomberg) -- Tata Consultancy Services Ltd. beat expectations and forecast a return to double-digit growth in FY22 after record deal wins underscored a global shift toward digitization during the pandemic.

Asia's largest software outsourcing provider reported profit rose 7% to 87 billion rupees ($1.2 billion) in the quarter ended December, compared with the average estimate of 85.9 billion rupees. Sales climbed to 420.2 billion rupees from 398.5 billion rupees in the same period a year earlier.

“The pandemic has provided the right fillip for large-scale adoption of digital technologies,” Chief Executive Officer Rajesh Gopinathan said during a post-earnings video conference. “We are confident of being back on double-digit growth trajectory in FY22.” The comment on the outlook is a departure for TCS which doesn't provide forecasts.

India's top software companies like TCS and rival Infosys Ltd. were expected to deliver their best December-quarter performance in a decade, defying a global downturn. Despite struggling with lockdowns that forced hundreds of thousands of their employees to work from home, the IT services industry has largely experienced healthy order pipelines, steady revenues and expanding margins. TCS said only 3.4% of its workers have returned to its offices.

India's $181 billion tech outsourcing industry is riding a wave of digital transformation that's expected to underpin deal signings and outlook revisions from its top players. Technology emerged as the second-best performing sector in India's equity market last year, behind only healthcare, as the pandemic hastened a push toward digitalization and work-from-home activities spurred demand for video-conferencing, cloud services and e-commerce. Global banks and insurers are accelerating efforts to shed non-core assets, like in-house tech support, as they navigate through the economic uncertainty of the Covid-19 pandemic.

Read more: Indian Software Firms Seen Raising Guidance on Strong Outlook

What Bloomberg Intelligence Says
Tata Consultancy Services' culture of investing for the long run, brand, low employee attrition and scale sets it apart from rivals, and we believe this will continue to drive market share gains over companies such as IBM, which are struggling to show any growth. A boost in spending on digital transformations and a need for deeper IT savings will be the main drivers that accelerate sales growth over the next 2-3 quarters.
- Anurag Rana and Sonak Kolar, analysts
Click here for the research.

Gopinathan has said TCS is witnessing a faster-than-expected recovery, which is sustainable and the recovery has “strong legs.” The phase of extreme volatility has passed, Gopinathan said last quarter, when he announced the resumption of salary hikes for employees. Its shares are up 38% over the past year, outperforming the Sensex's 19% climb. Infosys, which reports results next week, has gained about 80% over the same period.

The company is prepping for the longer term as well. TCS has recently announced acquisitions such as of the IT unit of Deutsche Bank AG and Pramerica Systems, a unit of Prudential Financial Inc., which could help it expand into new areas.