TCS shares tank, analysts positive on FY15 outlook

Tags: News
Shares of Tata Cons­ultancy Services (TCS) plun­ged 4 per cent on Wednesday after the com­pany ma­n­agement hinted at weak numbers for the March quarter, but stock analysts largely remained upbeat in their projections for the stock, citing better discretionary outlook, ste­ady order book and strong positioning across verticals.

TCS chief financial officer Rajesh Gopinathan in an analyst briefing on Tuesday had hinted at weak revenue growth for the fourth quarter, which caused the stock to shed 4 per cent in Wednesday’s trading.

While the March quarter is generally weak in terms of international revenues, the IT major expects slower domestic revenue growth due to the forthcoming elections.

Domestic business accounted for 7.8 per cent of TCS’ revenue in FY13. Analysts point out that its domestic revenues (up 18 per cent QoQ) had contributed over 40 per cent of the incremental revenues in the year-ago quarter. In the first three quarters of FY14, the domestic business brought in 6.3-7.6 per cent of the firm’s total revenues.

IT bellwether Infosys last week made a similar projection for FY14, saying it might end the year at the lower end of its revised 11.50-12 per cent revenue growth guidance.

“We believe many of the factors that led to the recent slowdown will continue to impact our clients’ spending at least in the initial part of FY15. And if the growth rate in Q4 is lower than expected, it will set the base for FY15 and may impact our FY15 growth rate,” CEO SD Shibulal said.

Unlike Infosys, TCS does not give revenue guidance, but targets a profit margin of 27 per cent. The firm on Tuesday said it hoped to grow faster in the first half of FY15 than in the second half, led by discretionary spend and increased penetration in European markets.

The TCS management had projected weaker domestic growth in the fourth quarter at least two months back, during its third quarter earnings call. It had cited soft domestic business and delay in clients’ discretionary spending until the election.

The company had then said that growth would likely remain conservative in its India business until the September quarter.

On Wednesday, the stock fell by a steep 5 per cent in the morning session, but recovered a bit to end the session 3.84 per cent down at Rs 2,040.95.

Ashish Chopra and Siddharth Vora of Motilal Oswal Financial Services said, “India is the only market with a sluggish outlook going into FY15. On most other geographical segments, TCS remains upbeat for the next year. It has also brushed aside concerns on the retail vertical, as highlighted by Infosys last week owing to weak profitability of clients, inclement weather conditions in the US and some rampdowns.”

The BSE IT index has fallen 11.45 per cent this month, eroding all the gains it made in the previous two months. The index is down 4.55 per cent this year, compared with 3.13 per cent gain for the BSE Sensex.

“After the disappointment from Infosys, we believe TCS’ outlook of no cancellations/ramp-downs, no vertical-specific weakness and better discretionary outlook for FY15 reinforces our confidence in the underlying demand trends in the sector,” said Ashwin Mehta and Pinku Pappan, analysts at Nomura India.

“The management indicated that revenues from the US and the UK could grow in line with the company average while Latin America is expected is grow faster than the company average,” said Ankita Somani of Angel Broking.

“We expect TCS to outperform the industry in revenue growth due to superior market reach and excellent execution,” she said.

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