TCS: Continued weakness in revenue disappoints

Slower growth in Japan, Diligenta and energy businesses hit constant currency revenue growth

Lower-than-expected constant currency revenue growth was a key disappointment in Tata Consultancy Services (TCS)’s September 2015 quarter results. While this metric at 3.9 per cent appears healthy, it fell short of analysts’ expectations of 4-4.5 per cent constant currency revenue growth. This is the fourth quarter in a row that the company has missed Street expectations on this front. Continued weakness in its insurance arm, Diligenta, Japan and energy businesses weighed on the company’s topline.

While weakness in the energy segment is an industry-wide trend, the TCS management believes the other two pressures will continue for the rest of this fiscal. A seasonally weak second half (on account of holidays and consequently lower number of working days) might restrict growth.

The company indicated that it is witnessing flattish pricing unlike the intensified competition faced by some of its peers on this front. But, even as pricing is flattish, the realisations (after taking into account employee expenses, pricing and other factors) will be volatile in coming quarters.

Among the positives, in rupee terms, TCS managed to just about meet expectations. Its revenues grew 5.8 per cent sequentially (over June’15 quarter) to Rs 27,166 crore and were largely volume-led. The company’s volume growth stood at 4.9 per cent sequentially and was higher than that of Infosys.

A weaker rupee versus the dollar aided TCS’ Ebit (earnings before interest and tax) margin in the quarter. This metric expanded by 78 basis points sequentially to 27.1 per cent, and was a tad ahead of estimates as well as 25.5 per cent clocked by Infosys. However, employee utilisation was down marginally, while attrition inched up a bit, and hence restricted margins gains in the quarter.

TCS’ other income fell 12.5 per cent in the quarter, despite forex gains in the quarter. Consequently, net profit grew by 6.1 per cent to Rs 6,055 crore and was a tad ahead of Bloomberg estimates of Rs 6,027 crore. Though the management remains confident on growth, revival in the two pressure segments will be key.

At Tuesday’s closing price of Rs 2,597, TCS scrip trades at 18 times FY17 estimated earnings. Analysts believe the stock could see some downside on Wednesday in response to the miss on constant currency revenue growth and the fact that the scrip is trading close to its all-time highs.

Most analysts remain positive on TCS owing to its consistent financial performance over the past few years.

The company continues to invest significantly in the digital business which is growing at a rapid pace. Well diversified revenue model, consistent track record and strong execution are TCS’ key positives.