TCS, HCL Tech take more hit from Chennai rains

Revenue growth for the two companies could get impacted but concerns seem priced in

The recent Chennai floods could add to Tata Consultancy Services (TCS)'s woes, which has issued a revenue warning, saying the floods could have a material impact on its performance in the December quarter. TCS has 65,000 employees (or 19.4 per cent of its workforce) in Chennai and has tried to reduce the impact by leveraging its employees in other centres in India, as well as abroad. Analysts believe the event could reduce the company’s overall sequential revenue growth by 70-100 basis points in the quarter. HCL Technologies is another information technology company which could witness about 80 basis points impact on its revenue growth this quarter on account of the floods, say analysts at IDFC Securities.

This is because about 37 per cent of its total workforce is from Chennai. Infosys and Wipro are relatively better-placed on this front, given that Chennai employees form just 13 per cent and 12 per cent of their overall workforce. Analysts believe the impact on their revenue growth will be much lower at 20-30 basis points in the December quarter.

These estimates are after considering a couple of levers at the disposal of these IT companies. First, fixed price projects (FPP) form about half of Indian IT companies’ revenues with the rest coming from time and material (T&M) based projects. Higher the revenues from FPP, lower will be the impact of such events on any company. HCL has the highest FPP revenues (among Tier-1 IT companies) at 56.2 per cent, with the rest getting 45.5 per cent to 53.4 per cent revenues from FPP. Second, IT companies are looking to work on Saturdays (usually an off-day) to compensate for the lost billable man-hours. Thus, effective implementation of these would determine the actual revenue impact for these companies.

Nevertheless, IT companies’ performance in the December 2015 quarter could be subdued as it is also seasonally weak for the sector given higher number of furloughs and thus lower working days. This quarter, cross currency headwinds could also slice away 20-40 basis points of revenue growth for tier-1 companies, estimate analysts.

Despite the additional costs towards transportation, food and accommodation, the margin impact is likely to be small at 10-30 basis points, as rupee depreciation versus the dollar could aid profitability. TCS shares slipped two per cent intra-day on Monday, while Infosys, HCL and Wipro closed with minor gains. Revenues of both TCS and HCL Technologies have lagged analysts' estimates in recent quarters and with the Chennai events, these companies may thus take longer time to reverse the trend. In this scenario, analysts may trim their full year revenue estimates for these companies post the results. Their stocks however may not see significant downside given that they have already corrected visibly in recent months rendering valuations reasonable.