Why TCS plans to focus more on US clients in FY23

As TCS announced its Q1FY23 results on Friday 08th July 2022, two things stood out. Firstly, the operating profit margins compressed further to the 25% mark as higher manpower costs, travel costs and attrition expenses took their toll. At the same time, the rate of attrition at TCS in the first quarter touched an all-time high of 19.7%. Amidst these two key challenges, there was one more challenge that TCS faced. Clients in Europe were getting more cautious on tech spending with a fear of deeper recession likely to delay decisions. 

Not surprisingly, TCS underlined as part of its results announcement that US could be the true driving force of TCS growth in the coming fiscal year FY23. With macroeconomic pressure already pulling Europe down and the US markets outperforming on the top line front, the focus would logically shift to the US market. While the US is also facing recession with two consecutive quarters of negative growth in GDP, the tech spending in the US is likely to remain a lot more robust and inelastic compared to Europe.

Unfortunately, Europe is a market that really matters for TCS with its considerable exposure to the UK and the EU region. Currently, the UK and EU regions combined contribute around 31% to the total revenues of TCS. However, in the Q1FY23 period, the TCS UK business was down -3.3% while the revenues from Continental Europe business was down -0.7%. this is the sequential de-growth, although on a yoy basis, both the UK and continental Europe business showed growth of over 12% in the top line. 

For FY23, TCS is fairly confident that the North America growth drivers would be strong enough. However, the problem gets compounded for TCS due to their heavy exposure to the UK and EU market. This could also be an indication that the second half of FY23 could be slower than the first half for TCS. For now, it looks like there will not be much of an impact on tech spending in the US. Overall, revenue growth for TCS in the full year FY23 is pegged at around 10.2%, which is much lower than 15.5% recorded in the first quarter.

According to TCS, clients in Europe were a lot more cautious on tech spends given the possibility that the region could slip into a much deeper recession due to the ongoing conflict in Eastern Europe. There is already a fear that Europe may run out of fuel and gas if the Russian supplies do not commence immediately. That itself is making most of the European business cautious about the medium term. On the other hand, the risk of a slowdown in tech spending in the US is only in the even of a deep recession.

One section of the analysts feel that many of these risks are still macro level risks. However, at the operational level, business momentum remains healthy. TCS itself has not faced any softness or decision delay. This is true of Europe and more so for the US and the North American region. Also, the general view is that even if there is a recession, it would be shallow and would not impact the tech spending too meaningfully. However, even Rajesh Gopinathan admitted that Europe posed a bigger risk for TCS in FY23 in top line growth.

The problem gets a little more complicated because competitor, Accenture, has just reported double digit revenue growth in Europe in the latest quarter. In fact, Accenture experienced over 30% revenue growth in local currency and the key practices that led this growth were industrial, consumer goods, retail and travel services; apart from BFSI. In case, TCS does see some serious de-growth in the European region, they would also have to do some answering on why Accenture had outperformed. For now, the focus will be on the US.