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TCS set to become world's third-largest IT services company

Livemint:  May 08, 2019

New Delhi: Tata Consultancy Services Ltd (TCS) is set to surpass DXC Technology Co. to become the world’s third-largest software services provider in fiscal 2018-19, marking the first change in the pecking order of the information technology (IT) outsourcing industry in two years.

If TCS does surpass DXC, it will only lag behind International Business Machines Corp. and Accenture Plc.

DXC Technology, formed by the merger of Computer Sciences with a division of Hewlett Packard in 2017, needs to clock a 5.06% sequential growth in the fourth quarter to end with $20.91 billion in revenue. Most analysts believe it is unlikely that DXC will manage this growth. DXC declares its fourth-quarter earnings on 23 May.

TCS grew 9.6%, or added $1.82 billion in new business, to end with $20.91 billion in revenue in the year ended 31 March.

In the first nine months of 2018-19, TCS generated $15.52 billion in revenue, more than the $15.47 billion in business done by DXC.

TCS’s strong performance over the two years has seen a change of guard at the top. In 2017, TCS entrusted Rajesh Gopinathan, who was then chief financial officer, to take over as chief executive and succeed N. Chandrasekaran, who was named the chairman of Tata Sons Ltd. Still, the company managed to retain all its senior executives and improved its growth and profitability, with the consensus view that this was one of the smoothest management transitions at an Indian corporate entity.

In contrast, DXC has divested and restructured much of its businesses. DXC had $25.39 billion in revenue when it was set up in 2017, while TCS ended with $17.57 billion in revenue. This implies that over the last two years, DXC has seen its revenue decline by more than $4 billion, while during this time TCS has added $3.34 billion in incremental revenue.

Much of DXC’s lost revenue was on account of the company selling its US public sector business, which accounted for $2.8 billion in revenue, to private equity firm Veritas Capital last year.

IBM, which ended with $79.59 billion in revenue last year, does not disclose business from IT outsourcing services. However, the company got $69.76 billion in business from global business, technology services and cognitive solutions, all of which can be clubbed under IT services business. Accenture ended with $39.57 billion last year.

“TCS is widely described these days as the ‘Walmart of IT Services’—the firm can pretty much win any large deal it wants and deliver it," said Phil Fersht, chief executive of US-based HFS Research. “Its size and execution focus put it in a commanding position in the market and this is almost impossible for the likes of DXC to compete with."

“I see Accenture emerging as its principal competitor with its SynOps platform, and these two will duke it out for market dominance over the next 2-3 years," he said. “DXC will likely strip off several business divisions and add more in the future as Mike Lawrie (chairman and CEO of DXC) tries to find a final point to regrow a firm that is, quite frankly, in a lot of trouble trying to compete in an extremely cut-throat market."

TCS’s industry-leading profitability even while recording double-digit revenue growth is another metric that has helped investors repose faith in the company’s stock. TCS ended last year with a 25.6% operating margin, while Accenture and DXC had 14.8% and 14% profitability, respectively.

The IT outsourcing industry is facing threats from newer technologies such as automation software, cloud computing and artificial intelligence-powered platforms, which are redefining—and making redundant—the traditional approach of vendors deploying armies of engineers to manage the information technology infrastructure work for companies.

This is reflected in the declining revenue (of IBM) or slow growth at some of the other large companies (Cognizant Technology Solutions Corp). Last week, Cognizant, which ended with $16.12 billion in revenue last year, slashed its full-year growth outlook to 5.1% in constant currency terms from an earlier forecast of 9%.

For now, Accenture and TCS are the two companies among the large IT firms that appear to have steered through this disruptive period with any degree of success.

“It’s a beautiful industry. There is no other industry that has multi-decadal growth visibility. All we have to do is execute well and to make sure our capabilities are in tune with where the opportunity lies," Gopinathan said in an interview earlier this year.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.