Growth jitters take 'byte' out of TCS; nears 52-week low on growth concerns

In past two days, TCS was down 4% to Rs 3,624.90 on fears of a slowing US economy and trading close to its 52-week low of Rs 3,593.30 touched on June 4, 2024.

Shares of the country’s largest IT services provider Tata Consultancy Services (TCS) continue to remain under pressure and hit a new eight-month low of Rs 3,624.90 intraday on Tuesday before closing at Rs 3,631, down 1.19 per cent. In the past two trading sessions, the stock price has declined 4 per cent on fears of a slowing US economy.

 

The stock, which is trading close to its 52-week low of Rs 3,593.30 touched on June 4 last year, has also underperformed the benchmarks as well as its peer index. In the past month, it underperformed the market by falling 11 per cent as compared with the BSE Sensex which was down 1 per cent, and the BSE IT index which slipped 6.7 per cent.

 

Industries reliant on exports such as IT services, chemicals, and automobiles are struggling with slower global economic growth, supply chain disruptions, and pricing pressures. The IT sector, a traditional growth driver, is witnessing weaker deal momentum and cautious client spending, while chemical exports are under stress due to lower global commodity prices and subdued international demand, according to Motilal Oswal Financial Services.

 

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Since January 1 this year, after the company's December 2024 quarter (Q3FY25) results, the stock price of TCS has corrected 16 per cent after it reported revenue of $7.54 billion, down 1.7 per cent quarter-on-quarter (Q-o-Q) and up 3.5 per cent year-on-year (Y-o-Y) (in constant currency terms, flat Q-o-Q and up 4.5 per cent Y-o-Y). 

 

Earnings before interest tax (Ebit) margin came in at 24.5 per cent, up around 40 basis points (bps) Q-o-Q, despite headwinds led by operating efficiency through productivity, utilisation and pyramid improvement.

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In a quarter that saw major cross-currency volatility, TCS’s strong execution, cost management, and deft currency risk management helped deliver healthy margin improvement and free cash flows. Disciplined investments in talent and infrastructure should lend good support to long-term business growth, the management had said.

 

The company’s tone, according to Nirmal Bang Research, has shifted from caution in Q1FY25 to increasing confidence by Q3FY25, backed by strong total contract value (TCV) performance, improving deal cycles, and discretionary spending picking up. Clients are prioritising cost efficiency and technology modernisation, with demand in BFSI and retail gaining traction.

 

After Q3FY25 earnings, analysts at KRChoksey Shares and Securities have revised the FY26E EPS estimate to Rs 153.9 (earlier Rs 158.2), reflecting slower-than-expected margin improvement. While management aims for an Ebit margin of 26-28 per cent, the brokerage firm said it anticipated a more gradual progression, with meaningful margin expansion likely to materialise by FY27. Analysts said this will be driven by stronger deal wins and improved discretionary spending, supported by faster deal closure cycles.

 

Management sees early signs of revival in discretionary spending in BFSI and retail. Near-term challenges can be seen in manufacturing, life-science, and healthcare which are expected to bottom out and growth would be seen only in the medium term. Manufacturing would continue to face softness due to macro-economic & industry-specific issues in auto & aerospace (would recover in the near term). For the communication vertical, it is expected to face challenges led by technology-driven cost optimisation, analysts at IDBI Capital said in the Q3FY25 result review.