It’s time chief executive officer and managing director Natarajan Chandrasekaran sheds the invented-here approach at Tata Consultancy Services Ltd (TCS), India’s largest software services company.
For the first time since TCS went public in 2004, its annual growth will be less than or at best on par with Accenture Plc., which is double the size of the Mumbai-based company.
Accenture’s aggressive acquisition streak (a little over $1 billion spent last year) in buying boutique design firms and analytics and cloud computing companies contributed significantly to its overall growth.
Analysts estimate TCS to report at-best 6% dollar revenue growth in the financial year ending March. Client-specific challenges, a negative cross-currency impact and macroeconomic uncertainty means TCS will likely see tepid 0.3% sequential growth in the third quarter, and 0.5% growth in the current quarter (See table).
TCS, which ended with $16.5 billion in revenue last year, has stubbornly shied away from making any acquisitions, as the management believes it can build new technologies in-house.
A spokeswoman for TCS declined to offer a comment as the company is in the quiet period ahead of declaring its third-quarter earnings on 12 January.
Accenture, which follows a September-August fiscal year, reported a 6% increase in revenue in the year ended August 2016. However, Accenture’s 15 acquisitions accounted for 2 percentage points of overall 10.5% constant currency growth. Constant currency eliminates the effect of currency movements.
In the current year, Accenture is expected by analysts to record 5% growth.
Considering TCS reported 15% growth in 2014-15, and 7.1% growth last year, a projected 6% increase in the current financial year underlines the biggest concerns analysts have on the future of India’s $150 billion outsourcing industry: growth is slowing because of not enough investments in disruptive technologies.
Although digital remains a fuzzy word for now, growth in cloud computing or analytics or security offerings at home-grown companies lags that of Accenture.
Accenture claims its “New” offerings, which include digital, cloud computing and security-related solutions, accounted for 40% or $13.15 billion in revenue.
The new solution offerings reported over 30% growth in the year ended August last year. During the July-September period last year, TCS’s digital offerings grew 24% from the year-ago period to $704.2 million, or 16.1% of its quarterly $4.37 billion in revenue.
Hearteningly for home-grown technology firms like TCS, higher profitability is one reason which should assuage concerns for now. TCS’s 26% operating margin at the end of September period is far higher than Accenture’s 14.6% profitability at the end of August. This higher profitability offers Indian firms to offer price discounts in commoditized outsourcing deals, and enough cash to spend on acquisitions.