Industry

Revenue warning: Investors still prefer TCS

TCS shares fell by only half a per cent on Monday and closed nearly unchanged on Tuesday. Photo: Mint

Tata Consultancy Services Ltd (TCS) said last Friday that the Chennai floods will have a material impact on its revenue in the December quarter. Already, growth has been a struggle for the company this year. Organic year-on-year (y-o-y) growth fell to around 6% in the first half of the year in dollar terms.

The initial reaction by investors suggests they have taken the news in their stride. TCS shares fell by only half a per cent on Monday and closed nearly unchanged on Tuesday. This seems surprising in the backdrop of lower growth estimates for the company, also because of weakening economic indicators in the US. But the rupee has weakened lately and is providing some cushion to earnings estimates.

Analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a note to clients, “After our interaction with the TCS management and their revenue warning on the Chennai flood impact; we are moderating our revenue growth expectations. We lower our FY16/17F USD revenue growth expectations to 7.8/10.7% (versus 8.4/12.4% previously) given 1) weaker exit rates of below 10% y-o-y in 4Q and 2) our cautious stance on demand in light of weakening macro indicators (client financials, US PMI).”

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Note that at the beginning of the year, Nomura’s analysts had forecast a compound annual growth rate of 13% in dollar revenue between 2014-15 and 2016-17. This has effectively been cut to 9.2%. Still, TCS shares have fallen by only around 7% since 1 April, less than the over 10% drop in the Nifty. One reason could be the nearly 8% fall in the rupee vis-à-vis the dollar since April, due to which earnings estimates have not been impacted by the same extent as revenue estimates.

But it also looks like investors are reposing faith in the company because of its clear outperformance in the previous five fiscal years. TCS has done fairly well compared with its peers in terms of valuations. Based on Nomura’s one-year forward earnings estimates, it trades at a premium of 9-10% to Infosys.

“We believe TCS is likely to underperform Infosys on revenue growth in FY16/17F (after five years of outperformance) and in such a scenario valuations are likely to equalise,” Nomura’s analysts said. Evidently, investors are in no hurry to bring about this parity.
[“source -livemint”]

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