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For TCS, road’s less Sandy from here

Wednesday, 19 December 2012 - 3:00am IST | Place: Mumbai | Agency: dna

Having lowered its growth outlook to 13% from 16% at the start of the year, TCS sais that it sees the second half of the calendar year 2013 as a vast improvement on the first.

The bad news is all in the past, the road from here is one of steady growth. Or so TCS, the country’s top software exporter, would have us believe.
Having lowered its growth outlook to 13% from 16% at the start of the year, after factoring in third-quarter seasonality and Hurricane Sandy, the company told analysts on Monday that it sees the second half of the calendar year 2013 as a vast improvement on the first, riding on a pick-up in large deals from traditional verticals and increasing discretionary spend.

The optimism, which holds out hope for the industry at large, is not lost on the analysts either. Not only is the company seen outperforming peers in the fourth quarter, but even going for acquisitions.

“Most clients have spoken about multiple spend areas which will get budgets in CY13 with a good number of initiatives in the discretionary space. TCS also hopes to gain an incremental share given that vendor consolidation still remains the theme,” Pralay Das of Elara Securities noted.

Urmil Shah of Kim Eng also painted an upbeat picture. “TCS is looking at acquisitions in the cloud and mobility segments, especially in Europe and Latin America, materialisation of which would provide an upside trigger for our forecast.”

Meanwhile, the drag from the seasonally slow third quarter has led analysts to reduce the company’s dollar-revenue growth outlook for the current fiscal.

“We believe TCS is likely to deliver a 3-3.5% quarter-on-quarter volume growth in the third quarter as compared to 4.9% in the second quarter because of fewer working days – Hurricane Sandy (which lashed major parts of the US in October) added the loss of one extra working day – and addition of freshers into the system, with hiring targets of 25,000 for the year being maintained,” Ankita Somani of Angel Broking said in a note.

“The company, however, maintained that it would be focused to deliver 27% Ebit (earnings before interest and tax) margin for this fiscal. If Ebit margins decline by 30-40 basis points on-quarter during the third quarter, then TCS would be required to post a 130-140 basis point on-quarter expansion in Ebit margin in the final quarter to achieve the 27% target for full year,” she said.

While the management maintained that the pricing environment was stable, it expects to hedge losses of around `30-35 crore based on the hedge positions taken and the premium that it would have charged by December, Somani pointed out.

Sashi Bhushan and Pratik Shah of Prabhudas Lilladher said that while there is no pricing pressure, the “management didn’t rule out volume discount.”

“Growth is likely to be well spread out across geographies and verticals, except telecom which continues to remain weak, especially in Europe. Hi-tech will also show seasonal weakness in the December quarter,” said Bhuvnesh Singh of Barclays Equity Research.
TCS could also see some pressure in manufacturing, despite its peers indicating great revenue potential from this vertical this fiscal, analysts noted. However, considering less than a dozen clients have been impacted by Hurricane Sandy and given that the company has already closed two large deals in the current quarter – Mitchells-Butler and UK Home Office – the effects of the third-quarter furloughs are expected to be neutralised somewhat.
Morgan Stanley noted that the TCS stock has corrected around 16% from its peak in the last three months and has underperformed the broader market year to date. “We believe TCS might need a 100-150 bps on-quarter improvement in the fourth quarter to maintain 27% Ebit margins this fiscal, despite a 12% rupee depreciation through the year. In fact, the company is now expected to grow 13-14% this fiscal.”

Even that is above Nasscom’s 11-14% guidance.

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