TCS: Uninspiring performance

No doubt, the times are difficult. But Tata Consultancy Services (TCS) has disappointed even the Street’s tempered expectations, missing revenue and earnings before interest and tax(ebit) forecasts. Revenues were down 5.8 per cent sequentially versus 3.7 per cent for Infosys (in dollar terms), partly because of a higher exposure to the euro and pound. In constant currency terms, they rose 1.2 per cent, similar to that of Infosys, with prices down 10 basis points.

Analysts, however, are somewhat confounded because the sequential increase in volumes of 2.4 per cent was better than Infosys’ 2 per cent and pricing trends were more or less similar.

Besides, TCS also enjoyed a reasonable shift of business offshore, which should have boosted the ebit margin by more than the reported 50 basis points to 24.7 per cent, given that there was also some cost savings; Infosys ebitda margins were up 200 basis points to 35.1 per cent. A forex loss of Rs 250 crore for TCS meant that the net profit grew just 7 per cent sequentially, again below expectations.

The management conceded that pricing could come off in the future; moreover, utilisation could fall with projects getting delayed or cancelled and attrition coming down. That means margins are likely to be under pressure.

While volumes were up in December quarter, and the company has bagged several clients and some big deals, the trend is unlikely to continue because verticals such as manufacturing are expected to slow down.

Already TCS has a high exposure to the vulnerable banking and financial services space. As such, analysts now expect dollar revenues to grow around 8 per cent this year, which would be among the lowest in the industry, while for 2009-10, the growth could be low in single digits. At Rs 504, the stock trades at around 9 times estimated 2009-10 earnings, while Infosys at Rs 1,268, trades at just over 12 times.