earnings growth may remain mutedTCS 

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TCS earnings growth may remain muted It is highly unlikely that TCS’ organic revenue growth in the current fiscal year will be higher than the previous one Mobis Philipose inShare 0 inShare 0 Comments Subscribe to: Daily Newsletter Breaking News Latest News 11:17 AM IST TCS, HCL Technologies shares fall over 8%; CMC dives 16% 10:38 AM IST Sensex trades marginally higher; M&M, Hero MotoCorp gain 10:32 AM IST Modi government’s MGNREGA conundrum 10:02 AM IST Fuzzy numbers make China’s economy world’s biggest 09:58 AM IST Bilawal Bhutto seeks Pakistan political revival in democracy defence Editor's picks Modi launches labour reforms to make doing business in India simpler TCS Q2 profit up 13.2% to Rs5,244 crore but lags estimates Tata Steel refinances international debt portfolio India reviews Ebola preparedness Danone may part ways with joint venture partner Rahul Narang Group The company said in a call with analysts that its assertion that FY15 growth will be higher than FY14 now needs watching. Photo: Mint Investors will be disappointed with Tata Consultancy Services Ltd’s (TCS’) September quarter results. The company reported organic revenue growth of 3.6% in dollar terms, nearly 1 percentage point lower than the mean estimate of five large institutional brokers. One can argue that investors have themselves to blame for setting high expectations. After all, the TCS stock trades at over 25 times trailing 12-month earnings. But the company must take a fair share of the blame as well. It has stated repeatedly that its organic revenue growth in the current fiscal year will be higher than the previous one. This now seems highly unlikely after the September quarter miss. Demand for IT services is generally soft in the second half of the year, thanks to furloughs in certain industries such as manufacturing and hi-tech, and a larger number of non-working days. The company said in a call with analysts that its assertion that FY15 growth will be higher than FY14 now needs watching. Chief executive officer N. Chandrasekaran said that revenue in the second quarter fell short by about $20-25 million vis-à-vis expectations. While growth in the Latin American region and in the insurance vertical disappointed, revenue was also slightly lower than expected in the retail industry, where some project ramp-ups got delayed. Compared with a year ago, September quarter revenue grew by 14.65% on an organic basis. While this is a healthy rate of growth, it is far from exciting considering where valuations are, and also keeping in mind the fact that the industry is estimated to grow by 13-15% this year. Growth in the June quarter stood at 15.5%. What’s more, while FY14 margins were buoyed significantly because of the sharp depreciation in the rupee last year, TCS has now chosen to reinvest currency-related gains back into operations. As a result, operating margin has fallen by over 300 basis points on a year-on-year basis. One basis point is one-hundredth of a percentage point. Operating profit grew by merely 4.8% on a year-on-year basis. Earnings growth is expected to remain muted owing to the above-stated reason. Analysts at Citigroup Research said in a recent note to clients, “TCS trades at ~23x 1-year forward valuations, which is a significant premium to rest of the sector. The last time TCS traded at similar valuations, the company was growing at a much faster rate of around 24% (compared with the expected growth rate of ~16.5% in FY15 in organic terms). While TCS continues to execute, it is difficult to see meaningful upside ahead – resulting in our neutral view on the stock.” Of course, all this is not to say that the company isn’t doing well or that the outlook on demand for IT services has changed much. Chandrasekaran said in the call that demand remains strong thanks to opportunities in the areas of simplification, digital and regulatory compliance. But thanks to the company’s high base, improving on growth in percentage terms is a tall order. With the company itself toning down its stance a bit on expected growth in FY15, and given where valuations are, investors may consider that the stock deserves a correction. 0 inShare 0 Comments Subscribe to: Daily Newsletter Breaking News 

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himanshu chaudhary