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TCS shares fall 2.8% on lower-than-expected earnings

LiveMint logoLiveMint 14-07-2017 Ravindra N. Sonavane

Mumbai: Shares of India’s largest software services provider, Tata Consultancy Services Ltd, on Friday fell as much as 2.8% after the company reported lower-than-expected June quarter earnings

The stock touched a low of Rs2,376.10 in intraday trade. At 9.46am, the scrip was trading at Rs2,391 on the BSE, down 2.2% from its previous close, while India’s benchmark Sensex index fell 0.07% to 32,015.44 points.

TCS reported a 240 basis points (bps) fall in its margins. The management attributed the decline to a 150 bps hit on account of higher salaries and an additional 80 bps drop because of adverse currency fluctuations. One bps is one-hundredth of a percentage point.

Operating profit was about 4% lower than analysts’ estimates. Revenue in dollar terms rose 5.2% from a year ago. Net profit declined 7% to $923 million in the June quarter from $992 million in the preceding three months.

This was the 11th consecutive quarter when the company has either under-performed or at best managed to match analysts estimates, Mint reported.

“We believe it is going to be extremely difficult for TCS to manage the growth-margin tight-rope walk, with macro (Visa regulations and Brexit), and structural (pricing pressure and inadequate marketshare in digital space) headwinds. Its large base ($17.6 billion), and relatively higher exposure to BFSI (40% of revenues) and UK (13% of revenues), will pose formidable challenges to its growth over the next few years,” said PhillipCapital, in a note to its investors.

According to PhillipCapital, TCS trades at 16 times price-multiple for fiscal year 2019 at a premium to Infosys (13 times) and HCL Technologies Ltd (12.5 times) despite the fact that all three companies will report almost the same USD constant currency revenue growth in FY18. The brokerage house finds the current valuations expensive and the risk-reward profile highly unattractive.

HDFC Securities has lowered its earning estimates (-1.8/-1.5% for FY18/19E) on margin moderation (-40 bps) and factored revenue growth of 8.3/8.6% and earnings before interest and tax (Ebit) at 24.9/25% for FY18/19E. Brokerage firm Motilal Oswal Securities has cut its earnings estimate for FY18 by 4% after factoring in the revenue and margin miss with 4% lower target price for the stock.

Of the analysts covering the stock, 14 have a “buy” rating, 26 have a “hold” rating, while 14 have a “sell” rating, shows Bloomberg data.

Meanwhile, rival Infosys Ltd gained as much as 3% after the company reported a rise in its first quarter profit as newer services such as analytics helped it bag contracts despite shrinking client budgets.

Net income rose to Rs34.8 billion ($540 million) in the three months ended June, compared with the Rs34.3 billion average of estimates compiled by Bloomberg. The company forecast fiscal 2018 sales growth of 6.5% to 8.5% on a constant currency basis.

Of the analysts covering Infosys stock, 40 have a “buy” rating, nine have a “hold” rating, while five have a “sell” rating, shows Bloomberg data.

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