TCS disappoints on all counts in second quarter

After delivering excellent performance quarter after quarter for the last 18 months, Tata Consultancy Services (TCS), India’s largest information technology (IT) company, seems to have taken a pause.

The company missed investors’ expectations on all counts - revenues, margins and net profits - in the second, or July-to-September quarter, as hedging losses and higher wage costs pulled down numbers. 

“While this is TCS’ first miss in almost 18 months and it does deserve some breathing space after the performance over the last two years, simply put these numbers are not good enough given TCS management’s super-bullish commentary through the quarter and TCS’ current bellwether status in the Indian IT industry,” CLSA analysts Nimish Joshi and Arati Mishra wrote in their note to the investors on Monday.

The duo said the tech major had disappointed despite moderated investor expectations after the recent European turmoil.
In the quarter gone by, even after beating peer Infosys

Technologies by recording 4.7% sequential dollar revenue and over 6% volume growth, TCS left the Street a tad upset as its earnings before interest, taxes, depreciation and amortisation (Ebitda) slip at 94 basis points (bps) was much higher than expected.

Most analysts had estimated around 50% drop in operating margins. Infosys’ expanded its margins by 210 bps in the quarter.
“We were expecting more (on margins), given the benefit from a benign currency,” said Joshi and Mishra in their report.

The Tata group’s IT services company’s net profit in the quarter was hit by forex losses, which were to the tune of `91 crore, and rise in wage costs by Rs1,073 crore. However, its forex losses were much lower than street expectations of Rs150-175 crore.
TCS’ pricing in constant currency also tumbled 95 bps for the second consecutive quarter.

The CLSA analysts said the setback in the TCS’ performance could have an industry-wide impact. “TCS’ industry-leading revenue growth and margins have been key drivers of its PE premium. However, the latest quarterly report is somewhat of a setback on the valuations front. The onus of proof now falls on TCS. Moreover, with industry-wide demand confidence also on hold due to the adverse macro situation, there seem multiple pressure points on street’s FY12/13 estimates,” they said in their report.

N Chandrasekaran, CEO and managing director, of TCS dismissed any such concerns; “Pipelines looks healthy and we have heard nothing negative from our clients. I feel the budget cycle is going to be on target and there are no delays. In fact, there might be budget increases in some situation. Mood across all sectors is positive.” TCS’ performance in the last quarter could see a flight of investor money from it to Infosys. A lot of investor money had moved out of Infosys into TCS through last nine months.   In the last quarter, TCS added 35 new clients while its net hiring was 12,580 people and gross employee addition 20,349 people.