Tata Consultancy Services shares fell as over 4.5 per cent on Wednesday, after India’s biggest outsourcer missed revenue growth estimates in the September quarter. This was the fifth consecutive quarter of TCS missing street estimate on revenue growth.
TCS ticked most boxes in Q2 – profit and sales (in rupee terms) were in line, operating margins expanded to 27.1 per cent, and volume growth was strong at 4.9 per cent sequentially.
The Mumbai-based IT major also reported its best quarter of deal wins, with total contract value of deals rising 30 per cent than the highest wins achieved in a quarter in the past.
But a comparison with rival Infosys was inevitable, considering the company is bellwether of India’s $ 150 billion IT industry.
TCS reported higher volume growth, but it lagged behind its Bangalore-based rival on many counts. The company’s constant currency revenue growth of 3.9 per cent (quarter-on-quarter) paled in comparison to rival Infosys’ 6.9 per cent growth; its pricing fell by 1 per cent, while Infosys reported a 3.4 per cent sequential jump in pricing.
Also, TCS margins expanded by 80 basis points, lower than 150 basis points bump that Infosys had reported.
“TCS posted 2Q results which were inferior to Infosys’ results on headline numbers,” said Ashwin Mehta of Nomura.
It’s not surprising that analysts are increasing their bullish bets in favour of the Bangalore-based company.
“TCS will lose the premium it used to command as the market perceives that the growth rate gap it enjoyed in FY14 and FY15 versus peers is likely to contract… We therefore prefer Infosys over TCS,” said Girish Pai of Nirmal Bang. The brokerage has a “sell” rating on TCS, with a target price of Rs 2,248.
Kawaljeet Saluja of Kotak Institutional Equities lowered the target price on TCS shares from Rs 2,800 to Rs 2,675, saying continued miss in performance and the company’s inability to make it count in strong quarters are worrying.
“TCS will end up with 8.7 per cent US dollar revenue growth in FY2016, which is hardly different from 8.6 per cent of Infosys,” Mr Saluja added.
However, not all analysts were critical. Ambit Capital said some of the softness in the revenue growth trajectory is temporary and may diminish in the next 1-2 years.
“TCS has a disciplined process of making the right investment decisions (such as in continental Europe and Japan markets) as well as ensuring that its cost structure is the lowest in the industry, which position it well for the long term,” said Ambit’s Sagar Rastogi and Kushank Poddar.
The brokerage retained its “buy” rating on TCS with a target price of Rs 3,050.
TCS shares closed 4.4 per cent lower at Rs 2,483.70, underperforming Infosys, which closed 0.16 per cent lower at Rs 1,097.60 and Nifty, which closed down 0.30 per cent at 8,108.