TCS drops nearly 4% as Q2FY16 revenue growth disappoints

TCS's clocked a revenue of $4,156 million, up 3% q-o-q, but was lower than the Street's estimate of around 4% growth

Shares of information technology (IT) major TCS traded nearly 4% lower on the National Stock Exchange (NSE) at Rs 2496 levels at 9:45am, after the company reported a revenue of Rs 27,165 crore for the quarter ended September 2015 as against a consensus Bloomberg estimate of 27,229 crore. By comparison, the CNX Nifty was trading 0.1% lower at 8,122 levels.

In US dollar terms, TCS's clocked a revenue of $4,156 million, a growth of 3% on q-o-q basis, but was lower than the Street's estimate of around 4% growth. This marks the fifth quarter in a row where TCS has missed revenue growth expectations.

"TCS reported a 3% q-o-q US$ revenue growth for September'15 quarter, lower than our estimates of ~4% q-o-q US$ revenue growth. Notably, the revenue growth from US lagged company-wide growth with Infosys, piping TCS both on incremental revenues as well as y-o-y revenue growth trajectory in September’15 quarter. We pare down revenue growth expectations further and now expect TCS to grow slower than Infosys in FY16E itself," says Manik Taneja, an analyst tracking the company with Emkay Global.

"We downgrade TCS to 'hold' given growth challenges in the sector. TCS’s premium valuations are at a risk, in our view. After the recent correction, we see Infosys resuming the relative outperformance versus TCS," he adds.

Rajiv Mehta of IIFL, too, has trimmed growth and earnings estimates for FY16/17 for TCS. Since he expects operating margin to come?off a bit over the next couple of years, the earnings growth would lag revenue growth and this could weigh on valuation, he says, and has downgraded his recommendation on the stock from ‘accumulate’ to ‘reduce’ with a lowered 12?month price target of Rs 2,466.