With Europe slowing, TCS says North America to drive its growth in FY23

The IT major indicated that clients in Europe are more cautious on tech spends given the possibility of deeper recession and ongoing conflict in Eastern Europe, leading to delays in decision making

IT services major Tata Consultancy Services' (TCS) Q1FY23 results were a mixed bag with revenue beating estimates and margins disappointing. But the larger concern is the fact that macroeconomic pressure is already pulling Europe down and and the company said that the US will be the growth driver in FY23.

During Q1FY23, TCS' UK business was down 3.3 per cent sequentially and Continental Europe business was down 0.7 per cent. However, on a year-on-year basis, the UK business grew by 12.6 per cent and Continental Europe business grew by 12.1 per cent.  

Unlike other players, softness in Europe is a bigger concern in case of TCS as close to 30 per cent of its revenues comes from that region. Even though the company is confident that the North America growth drivers will be strong, many analysts are taking this as the first sign of real pressure and hence an indication that second half of FY23 could be slower than usual for the IT giant.

“Despite intact commentary, the management indicated that the US will do better than Europe due to client concerns over the slowdown. In our view, this is an initial sign of industry commentary turning more realistic versus the current view of no impact on tech spends. We are factoring in TCS revenue growth of 10.2% YoY in constant currency terms in FY23 (vs 15.5% in Q1), as the growth moderates in H2FY23,” said a report by Mukul Garg and Raj Prakash Bhanushali of Motilal Oswal in their report.

The company indicated that clients in Europe are more cautious on tech spends given the possibility of deeper recession and ongoing conflict in Eastern Europe, leading to delays in decision making. It expects Europe business to be softer in the near term.

"We think that the Industry is at the start of a mega trend, which will likely keep demand strong unless we hit a severe recession. That said the European market is clearly weaker than North America and so a heavy concentration in Europe will somewhat slow growth relative to NA. All in all we see the market slowing from its torrid growth but demand remaining strong if not as strong," said Peter Bendor-Samuel, CEO, Everest Group. 

On TCS Bendor-Samuel said: "With respect to TCS its historic strengths in Europe (or higher concentration in Europe) may cause it to have a little more headwind than some of its competitors. However, TCS is well-positioned in NA and the cost savings become more of an objective. We expect TCS to do well in both NA and the EU. Hence I think it's unlikely that TCS has a poor last half of the year."

Dipesh Mehta and Ayush Bansal of Emkay Global in their report said: “It (TCS) experienced increased discussions on macro uncertainties, inflation and geopolitical situations with senior leaders/CXO at client organizations, particularly in Europe. However, at the operational level, business momentum remains healthy, and TCS has not experienced any softness or decision delay.”

“In the past we have seen whenever Europe has been slow we have progressed well. When we look at the kind of commentary we hear from customers. In the US the commentary is even if the recession comes it will be a shallow one. Whereas the clients in Europe it is expected to be more deeper,” said TCS CEO Rajesh Gopinathan on the earnings call post the result.

N Ganapathy Subramaniam, COO and executive director, TCS, also reiterated that in both UK and North America the company does not see any anomalies in customer behaviour or deal closures. “In UK there have been some concerns on increased cost of living etc, but that is a marco discussion. Customers across manufacturing, retail have not shown any concern,” he said during the earnings call.

The concern also arises as TCS' closest competitor Accenture has reported double digit revenue growth in Europe for its Q3 results. “Revenues grew 30% in local currency led by double digit growth in industrial, consumer goods, retail and travel services, and banking and capital markets. Looking closer at the countries, Europe was driven by double digit growth in Germany, the UK, France and Italy,” said the Accenture management during the analyst call.