TCS falls 4% on disappointing Q2 results, stock hits over 7-month low

Shares of Tata Consultancy Services (TCS) hit an over seven-month low of Rs 1,929, down 4 per cent on the BSE in early morning trade on Friday after the IT major on Thursday reported weaker-than-expected numbers for the quarter ended September 30 (Q2FY20). The stock was trading at its lowest level since February 25, 2019.

TCS reported 1.6 per cent sequential revenue growth in constant currency (CC) terms was the lowest in the past two years. It posted 1 per cent decline in the net profit at Rs 8,042 crore on sequential basis. Analysts on an average had expected net profit of Rs 8,255 crore for the quarter.

The company’s revenue and profitability were adversely affected largely owing to softness in financial services and retail verticals. Ebit (earnings before interest and tax) margin down by 20 basis points (bps) to 24 per cent on quarter-on-quarter (QoQ) basis.

“The Q2 margin performance was weaker-than-expected, led by a dip in utilisation owing to employee addition (+14,097 QoQ). Margin contraction due to employee revenue arbitrage may normalise in H2 (October-March) once cost-optimisation levers kick in,” analysts at Motilal Oswal Financial Services (MOFSL) said in the results update.

In the past two months, TCS has underperformed the market by falling 14 per cent, as compared to a 2 per cent rise in the S&P BSE Sensex.

“Growth performance this quarter only dampens the FY20 growth prospects further. EBIT margin contraction of 250 bps YoY is a reflection of high pressure on earnings growth. However, margins are likely to recover to an extent because of normalisation of utilisation. As we rationalise our effective tax rate (ETR) expectations, the earnings per share (EPS) downgrade impact is only partial. Demand outlook for the medium-term remains healthy considering strong deal wins,” the brokerage firm said.

Analysts at Dolat Capital have witnessed 1 per cent/4 per cent cut in FY20 revenue/EPS estimate owing to weak Q2 performance and with prospects of buyback now unlikely in the year.

“We believe that stock has already underperformed over last 3M (TCS -5 per cent, CNX IT -0.5 per cent), which has narrowed PE discount with Infosys (sub-10 per cent on 1 year FWD PE). We believe that negatives are largely factored in and thus any fall in the stock price should be used as an opportunity to Accumulate,” the brokerage firm said in the result update.

At 09:46 am, TCS was trading 3 per cent lower at Rs 1,947 on the BSE, as compared to a 1 per cent rise in the S&P BSE Sensex. The trading volumes on the counter nearly doubled with 5.2 million shares changing hands on the NSE and BSE.