Tata Consultancy Services (TCS), India’s largest information technology (IT) services provider, might soon discontinue sharing certain growth metrics. TCS is set to start a process by April this year to review the growth parameters representing the current business environment. Growing noise around metrics such as volumes and realisations along with increasing proportion of fixed-price projects are the key reasons behind this move.
“I think it’s time we got away from volume and pricing growth numbers. Current metrics were put in place long ago when TCS was a much simpler company. Now, given the mix of business we have, probably the volume growth number is resulting in more noise than any meaningful data interpretation. Probably in April 2015, while sharing the March quarter numbers, we’ll do some refresh on the metrics and take a full look at what is it that we have to disclose,” says Rajesh Gopinathan, chief financial officer and vice-president, TCS.
Notably, TCS and Infosys are the only large IT companies that share volume growth numbers. Two other major players, Wipro and HCL Technologies, have stopped giving these numbers. For the December 2014 quarter, TCS posted a muted 0.4 per cent volume growth, which was not only lower than the four per cent volume growth registered by Infosys, but also among the weakest in TCS’ history.
Increasing complexities in IT companies’ business mix is one reason why companies have done away with this metric. Also, volume growth numbers are not relevant in case of newer growth engines such as digital, SMS, Infrastructure management services, among others.
“The issue is not about the volume; the problem arises while calculating realisation. These two are parts of the same equation. We want to give as much like-to-like realisation as possible. So, we try to sterilise by comparing onsite to onsite, offshore to offshore and so on. We end up sterilising so much that we do not know what will be the output of this process. Thus, our ability to relate that back to what’s happening on the ground is getting more and more muddled. It’s better to report just the constant currency reported revenue, headcount and SG&A (selling, general and administrative) numbers”, added Gopinathan.
Analysts believe constant currency revenue growth is sufficient to give a fair sense of any company’s performance.
According to experts, some metrics have become redundant and, hence, need to be done away with. Shashi Bhusan, IT analyst at Prabhudas Lilladher, says, “In the past few years, there has been a massive change in the way industry operates and is being perceived. Change in reporting metrics is definitely inevitable. I do not think the Street will react negatively if TCS discontinues with the volume growth number.”
Some analysts believe the Street’s reaction to any change in metrics will depend on the timing of this move. “I think TCS should discontinue with the volume growth number in a quarter when its results are fantastic. Volume and pricing growth data have become irrelevant, given the rising number of fixed price projects contracts in the company,” says an analyst on condition of anonymity. Some analysts believe TCS should stop sharing details about the number of million dollar clients as well given the company’s large size.
One area where most analysts need further disclosures is the digital space. Disclosure on how companies define digital segment, the percentage of revenues this segment contributes and the way the revenues in this space are recorded will enable analysts to ascertain its potential in a better way. Almost all IT companies believe digital technology is the next growth driver for the sector.
Ankita Somani, IT analyst, MSFL says, “Volume growth number may not give true picture in the digital space, which the TCS management is talking about for four quarters now. We need to know how much growth is expected and how much investment TCS is making in digital and also how are they selling it.”
TCS management too is looking to share some metrics on its digital business going forward. Somani believes hiring is no longer a growth indicator for the industry and can be discontinued going forward.
Apart from digital, analysts believe IT companies should start sharing their order books similar to Accenture. However, given that the order book of IT companies has not reached steady state as yet and is fairly choppy on a quarterly basis, this disclosure is still some time away. Some analysts believe sharing of deal signings as well as guidance of targeted deal signings in the year will be another relevant data that can be shared by the IT companies.
“We are not just giving the information we are also responsible for what investors make out of this information. Our intention is not to reduce transparency but to figure out what is relevant. We still have some amount of thinking to do in terms of what to give,” adds Gopinathan.
Source: Business Standard