Background

A recession is defined as a decline in economic activity spread across various sectors, and lasting for a few months. A decline in GDP for two consecutive quarters is a major indicator of a recession, accompanied by impact to income, employment, industrial production, and retail sales. Recently, Union finance minister Nirmala Sitharaman addressed the Parliament, fending off debate on rising prices and recession. India is in a much better and resilient condition than their western counterparts. Inflation, however, remained an area where India continues to contain it under the 7% mark. But how will organizations like TCS, Infosys, and others who are considerably exposed to the United States economy deal with this looming fear of recession. Let’s find out.

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TCS EBIT Margin Analysis

The margin of Tata Consultancy Services was 23.1%. EBIT is defined as Earnings before Interest and Taxes. Even though this was better than HCL, which had 17% EBIT margin, it was still 2.4% narrower than June 2021 quarter. The good indicator of strong performing TCS margin are the $8 billion worth of deals which it won during this quarter. However, the trajectory has been rather on a flat pattern given the macroeconomics. Profit margins and profitable metrics are under strain and expected to continue to be so over the remaining of this year. One of the main factors being the slowdown of the technology sector in the Western countries. TCS, like many of its peers, has considerable exposure to the western economy and much of its’ revenue is in United States Dollars. The IT industry in India which is structured as an offshore base for overseas clients will thus start to feel the strain. TCS freshers and who has been joining recently might find it difficult to find projects in the near short term. Even though TCS has huge reserves and one of the most resilient organizations in this sector, a recession will have an impact.

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TCS Recession Impact

One of the main factors that the recession will impact first is salary hikes. That will lead to employees looking for opportunities to increase their wages, thus affecting the attrition rate. When it will happen, no one knows. TCS employs over 600,000 people. The attrition rate is nearly 20%, which is close to double from around a year back. If the current economic situation continues to hold for few more quarters, the strain will start becoming too much and any business in this situation will need to take remedial measures. With a strong set of core values and employee driven business model, TCS will no doubt keep priorities of its’ employees first as much as possible. However, with the travel and visa expenses adding up, it will become a challenge to get onsite opportunities. On top of it, the fluctuation of a weakening rupee will add to the cost of projects delivered by TCS. For the same amount of USD, the currency exchange rate converts to lesser in INR. Since all India employees have to paid their salary in INR, the impact is immediate. We can only hope the rupee does not devalue further.

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Let’s take a look at the most recent TCS quarterly results performance. I use this to understand where the organization is headed and a general sense of understanding how the overall IT industry stands today. With the information from these quarterly performance announcements, we can also analyze the trend of hiring of employees, joining dates, salary hikes, project pipelines, new acquisitions, and global expansion strategies.

TCS and Startup Salaries

The same programmers and engineers are targeted by TCS as well as many local e-commerce and fintech startups in India. While TCS has a solid strength in terms of financial stability and can provide considerably more job security, startups often burn enough cash on payroll that beats TCS salary considerably. Quality becomes key in such a situation. Should I compromise on quality and hire inexperienced code writers for lesser salary? Should I spend more and hire lesser number of experienced programmers to guarantee my product quality? It is a dilemma no one wants to have. But yet here it is. With the rise in inflation, the cost of learning increases, the cost of hiring skilled labor increases. If looked from a different perspective, labor is something the organizations are purchasing, which too has been hit by inflation. Thus an increase in wages is a natural phenomenon. If the wage does not increase as per inflation rate, then the effective salary is reduced. Smaller vendors providing consulting services, or independent freelancers providing programming and coding services often steps in during such times.

TCS Skilled Employees

Skill is something that TCS focuses greatly on. With continuous skilling up programs and an environment that encourages and nurtures employee talent, it is a pleasure to keep learning and delivering. However, skilled employees has certain expectations of compensation and not every skilled employee is loyal enough to deliver stellar performance for decades if a recession looms large. These trying times are test for a strong management. How to balance a workforce as large as TCS during recession? How to keep employees happy? How to handle inflation concerns? How to answer employee grievances? How to curb attrition rate? What benefits can be provided to employees that would make them feel even more inclusive? TCS has several social and employee driven programs that builds up connections and provides service to the community. These aspects are now more important than every before as employees compare organizations across every parameter and category before deciding for whom they should devote half their day. Often salary becomes a secondary factor when choosing an employer in such cases.

TCS Stock Price Prediction

The BSE IT index has fallen nearly 26% this year, which is similar to Nasdaq’s performance. The global economy is now so much interconnected that it becomes only a matter of time when the ripple effect will reach the other part of the world. The Indian IT stocks including TCS have experienced sharp corrections due to the fear of a global recession that is building up its roots in the United States economy. The Federal Reserve of India continues to put up a strong resistance against record high inflation rates. TCS stock price reached its 52 week low a few weeks back, a price that we saw nearly an year ago. However, a depreciating rupee may trigger a reversal for the IT index. Because even though the rupee is falling, for the same amount of United States Dollar TCS is now getting more in rupees. The stock prices are affected for all the major players, including Wipro, Infosys, Tech Mahindra, and IBM. The TCS stock price stood at 3,365 now, and is predicted to reach 3,900 by end of this year, a 16% growth to resume some stability. The weakening rupee negates out the effect in someway the higher cost of Indian wages and USD revenues.

TCS Investors Confidence

Investors in the Indian stock market including TCS have been skeptical due to fears of an upcoming recession. The recent interest hikes has also been a cause of worry for Indian IT companies. TCS revenue has grown 3.5% sequentially, slightly lower than consensus earnings estimates of 3.6%. But the TCS management commentary on demand and forecast continues to be robust. The pipeline of new opportunities for TCS continues to be strong and there are no signs of a demand slowdown. The TCS management is also observant of the macroeconomic conditions that may affect the overall economy and the IT sector. Communication with clients is also a key that TCS is giving a focus on. The TCS management is still looking forward to see how FY24 turns out in terms of the revenue or the margin performances. The demand for Artificial Intelligence, Data Analytics and other segments continues to be strong, says TCS COO N. Ganapathy Subramaniam.

We can also hear confident voices from the TCS CEO as well in the short term as well as medium term. Pipeline conversions in TCS continues to be strong, and there is no early indication of softening so far. There is increasing discussion about the recession in the TCS senior level, but no immediate footprint of the recession can be felt on the demand side.

It is expected that the United States will do better than Europe because of client concerns over the recession. Due to the war situation in Europe and the sanctions playing a key role close to them, Europe is worried more about their future. The technological spends and budget therefore continues to tighten for clients in Europe. So overall attrition and the margins will take a few more quarters to get highlighted as a significant factor which is affecting the Indian IT stocks and companies. Attrition moreover has a seasonality factor as well for which it has a predictable and timely pattern every year. The TCS stock even though has declined this year has a strong background of resilience. Many brokerage firms have trimmed the forecast of TCS earnings estimates after analyzing their recent results. Everyone is eager to see how the TCS valuation shape up from here. If the earnings downgrades get steeper the scenario will change and accordingly the investor expectations and outlook will vary. Organizations like Infosys as well have reported not too great performance over the recent times compared to their prior results. It is now a matter of time how the current climate plays out.