As Europe Slows, TCS Says North America Will Drive Growth in FY23
FY23 first quarter results for Tata Consultancy Services (TCS), a leading IT service, were mixed, with revenue beating estimates and margins disappointing. But the biggest concern is that macroeconomic pressure is already dragging Europe down and the company said the United States will drive growth in FY23.
During the first quarter of FY23, TCS UK business decreased 3.3% sequentially and Continental Europe business decreased 0.7%. However, on an annual basis, business in the UK grew by 12.6% and business in continental Europe grew by 12.1%.
Unlike other players, smoothness in Europe is a greater concern in the case of TCS, as almost 30% of its revenue comes from this region. Although the company is confident that the growth engines in North America will be strong, many analysts see this as the first sign of real pressure and therefore an indication that the second half of FY23 could be slower. than usual for the computer giant.
“Despite intact feedback, management indicated that the US will do better than Europe due to customer concerns over the slowdown. In our view, this is an early sign that feedback from the industry are becoming more realistic compared to the current view of no impact on technology spending.We assume TCS revenue growth of 10.2% YoY in constant currencies over the FY23 (vs. 15.5% in Q1), while growth moderates in H2FY23,” said a report by Mukul Garg and Raj Prakash Bhanushali of Motilal Oswal in their report.
The company said customers in Europe are more cautious about technology spending given the possibility of a deeper recession and ongoing conflict in Eastern Europe causing delays in decision-making. He expects business in Europe to be weaker in the near term.
Dipesh Mehta and Ayush Bansal of Emkay Global said in their report, “He (TCS) has seen an increase in discussions on macroeconomic uncertainties, inflation and geopolitical situations with senior management/CXOs of client organizations, especially in Europe.However, at the operational level, the commercial dynamic remains healthy, and TCS has not experienced any softness or delay in decision-making.
“In the past, we have seen that whenever Europe was slow, we made good progress. When we look at the kind of comments we hear from customers. In the United States, the comment is that even if the recession comes, it will be superficial. While customers in Europe, it is expected to be deeper,” TCS CEO Rajesh Gopinathan said on the earnings call after the result.
N Ganapathy Subramaniam, COO and Executive Director, TCS, also reiterated that in the UK and North America, the company is not seeing any anomalies in customer behavior or deal closing. “In the UK there have been concerns about the rising cost of living etc. but that’s a marco discussion. Manufacturing and retail customers have shown no concern he said on the earnings call.
Concern also arises as TCS’ closest competitor, Accenture, reported double-digit revenue growth in Europe for its third-quarter results. “Revenues grew 30% in local currency on double-digit growth in industrials, consumer goods, retail and travel services, as well as banking and capital markets . Looking closer at countries, Europe was driven by double-digit growth in Germany, the UK, France and Italy,” Accenture management said on the analyst call.