S&P Global Ratings on Tuesday said Tata Consultancy Services (TCS) is likely to face slower growth in revenue and profitability over the next 12-18 months, given subdued global information technology (IT) spending. However, the Mumbai-based IT major’s robust cash position and prudent financial policies will continue to support its financial position, it said.
“We are revising our outlook on TCS to stable from positive. At the same time, we affirmed our ‘A’ long-term issuer credit rating on the company,” S&P Global Ratings said in a statement. It added that the stable outlook reflects its view that TCS will maintain its good competitive position, robust cash holdings, and strong operating cash flows over the next 12-24 months.
S&P Global Ratings estimated that global IT spending will contract by four per cent in 2020, in line with its expectation of a 3.8 per cent decline in global GDP because of the COVID-19 pandemic. “We now expect TCS’ revenue to rise 0-1 per cent in the fiscal year ending March 31, 2021, compared with growth of 5.3 per cent in fiscal 2020,” it added.
S&P Global Ratings anticipates pricing pressures on new contracts and renewals because of the lower spending ability of clients in a highly competitive market. At the same time, TCS’ investment in onsite resources will continue, given persistent protectionist sentiment in global markets, it said adding that this will keep the company’s margins range-bound at 25-27 per cent in fiscals 2021 and 2022, compared with 27-28 per cent in the past two years.
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“Even so, TCS will likely maintain its industry-leading Ebitda (earnings before interest, tax, depreciation and amortisation) margins because of its cost advantage on offshore resources and good service delivery capabilities. “However, achieving a better business mix with a higher share of revenue from new-age digital services — similar to its stronger global peers — remains challenging in current operating conditions,” it said.
As such, an improvement in the company’s business position commensurate with an ‘a+’ credit profile will take longer, in S&P Global Ratings’ view.
TCS will continue to leverage its good market position to tap emerging opportunities. Demand for discretionary IT software and services is likely to remain weak in the coming quarters as clients look to trim budgets to conserve liquidity. Moreover, the pace of recovery will vary significantly across industry verticals and geographies, the statement said.
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“We estimate hard-hit sectors such as retail, travel, hospitality, and media will take more than two to three years to recover to pre-pandemic levels,” it added. It also said these sectors together contributed about 22 per cent of TCS’ revenue in fiscal 2020. “Infection rates in key markets such as the US, TCS’ largest client market (about 50 per cent of fiscal 2020 revenue), remain high and pose further downside risks.”
S&P Global Ratings said it expects TCS to benefit from its good market position and service delivery capabilities. The company will leverage client relationships to tap on demand for emerging areas of digital and workplace solutions to mitigate the weakness in the above sectors, it said. Also, TCS’ robust operating cash flows and prudent financial policies continue to underpin its strong credit profile. The company’s low capital investment requirements support its robust free operating cash flows. Its financial policy on acquisition spending remains conservative. This allows the company to maintain a strong balance sheet despite sizable shareholder distributions, the statement said.
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“Given the uncertain business environment, we expect TCS to remain prudent in its capital allocation policy and maintain its robust cash position. The company had zero debt as of June 30, 2020. The stable outlook reflects our view that TCS will maintain its good competitive position, robust cash holdings, and strong operating cash flows over the next 12-24 months,” it added. S&P Global Ratings also expects TCS to pursue conservative financial policies toward acquisitions and shareholder distributions.
“We may lower our rating on TCS if its operating efficiency weakens such that EBITDA margins fall materially and sustainably below 25 per cent,” it added. It added that an upgrade would require TCS to improve its business mix from new-age digital services while maintaining its strong profitability at around 30 per cent.
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