Tata Consultancy Services, country's largest software services firm, missed Street's already low expectations on the revenue growth front in the September quarter, however, margin performance beat expectations.
The consolidated revenue of the company grew nearly 8 per cent to Rs 29,284 crore in the second quarter, up from Rs 27,165 crore in July-September 2015, while margins jumped 130 bps to 26 per cent in the reporting quarter. The company expects margins to be in the range of 26 to 28 per cent through the rest of the current year.
Brokerage SBICAP Securities tweaked its estimates to factor in the weak Q2F17 performance and fluctuation in foreign exchange rates. The brokerage maintained 'hold' rating on the stock with a target price of Rs 2,460 (earlier Rs 2,650).
Brokerage Reliance Securities also downgraded its recommendation on TCS to 'reduce' from 'hold' with a downwardly revised target price of Rs 2,200 (from Rs 2,524 earlier).
Below are key reasons why brokerages cut their target prices post TCS' September quarter numbers:
1) Revenue growth below expectations
The IT giant's sequential revenue growth was the lowest in the company's reporting history in the second quarter, pointed out Emkay Global Securities. The management of the company said revenue growth was impacted by delay in India business, however Emkay noted that International business (ex-India) was also tepid at 0.7 per cent QoQ in dollar terms.
2) Volume grew lowest in 6 years
On year-on-year basis, volume grew 8.5 per cent, the lowest in 6 years since second quarter of FY10. "Reported pricing declined 1 per cent qoq, while yoy pricing declined for the 8th successive quarter, reflecting pricing pressure, particularly in commoditised services amidst a highly competitive business environment," said Reliance Securities.
3) Slowdown in key verticals
In terms of domain, the BSFI (40.4% of sales), posted a sequential growth of 1.2 per cent in constant currency terms, Retail & CPG (13.4% of sales) posted a CC QoQ de-growth of 3.1 per cent, while Communication & Media (11.4% of sales) reported a CC QoQ growth of 2 per cent. These three account for nearly 75 per cent of company's revenues. Manufacturing (10.7% of sales) and Healthcare posted CC QoQ growth of 3.1 per cent, and 4.7 per cent, respectively.
The company believes weakness seen in select verticals, like BFSI and Retail, and resultant downward growth trajectory witnessed in recent times are cyclical rather that structural in nature, as it believes demand would gain traction in the next few quarters. The company expects sequential growth in H2 to be better than historical trends. However, in Emkay's view, this is still a hope.
4) Geography-wise slowdown
UK saw a steep decline of 6.5 per cent qoq (-0.1 per cent in CC terms). Asia-Pacific grew at 3.5 per cent sequentially in CC, while North America grew 1.4 per cent sequentially. India declined by 7.6 per cent sequentially while Latin America continued to show volatility. Management expects its India business to recover in Q3, as orders worth Rs 1.8 billion were delayed by a quarter.
5) Future risks
Brokerage Reliance Securities has listed following key risks:
- Event-specific risks such as Brexit, which could impact IT budgets, cutting discretionary spend and delaying new deals
- With the US in an election year, noise about off-shoring taking away US jobs and risks of higher visa costs and a more punishing visa regime abound.
- Cannibalisation of existing revenue particularly on the ADM and ERP side by the shift to cloud architecture.
- Currency risks