Competition weighs on TCS shares

Fails to ease investor concerns that rivals will also benefit from rise in client demand

IT services provider Tata Consultancy Services (TCS) forecast faster sales growth in the next fiscal year but failed to ease investor worries that smaller rivals will also benefit from an anticipated rise in client demand.

Shares in TCS fell as much as 5.6% on Friday, on track for their biggest single day drop in more than 1-1/2 years, on concerns that the company will have to fight hard for contracts in the United States and Europe, the main markets for India's $108 billion IT services industry.

"Competition is getting fierce in the market and small players are becoming very aggressive. TCS may see some of its market share going to its rivals in the medium term," said Taina Erajuuri, a Helsinki-based portfolio manager at FIM India, whose holdings include TCS as well as rivals Infosys and HCL Technologies .

Global IT spending growth is expected to accelerate to more than 5% this year after growing last year at its slowest pace since the 2008 global financial crisis, research firm International Data Corporation said.

TCS beat analysts' expectations and reported a 49.6% quarterly profit rise on Thursday, its fastest pace of increase since mid-2011 at least.

Infosys last week also reported a higher-than-expected increase in its quarterly net profit and lifted its sales growth outlook for this fiscal year on signs of an economic revival in the United States and Europe.

TCS shares, however, are over-valued compared to Infosys. TCS trades at 21.2 times its forward earnings compared to 17.4 times for Infosys, according to Thomson Reuters data.

"The TCS stock was slightly overheated. Also, Infosys is emerging as a strong alternative," said Ashish Chopra, a sector analyst at brokerage Motilal Oswal Securities. "I don't think there is any worry about outsourcing demand."

Wipro is expected to report a 16% increase in its quarterly net profit on Friday.

STRONG REVENUE GROWTH IN 2014

Over the last two years, TCS has increased its sales revenues at a faster pace than both Infosys and Wipro, which have endured management revamps and strategy changes. TCS also beat its rivals in winning a bigger share of lucrative financial services outsourcing contracts.

TCS, part of the diversified Tata conglomerate, counts British insurer Aviva Plc and BT Group Plc among its clients. Its consolidated net profit rose to Rs 5,314 crore for the quarter ended December from Rs 3,552 crore a year earlier.

Revenue rose 32.5% in the quarter to Rs 21,294 crore and Chief Executive N Chandrasekaran forecast stronger growth this year.

"Based on initial discussions with our customers we believe 2014 will be a stronger year for us than 2013," Chandrasekaran said, without giving any specific figures.

"The number of deals and the total size in terms of value of deals that we are chasing is much higher than the same time last year, than any of the quarters this year," he told reporters after the earnings were announced.