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TCS shares fall 1% in morning trade; revenue growth pressures weigh

business Updated: Jul 16, 2016 02:36 IST
HT Correspondent
HT Correspondent
Hindustan Times

Shares of Tata Consultancy Services (TCS), slipped by 1% in morning trade, despite the company reporting better-than-expected first quarter net profit. Analysts point to lower than estimated US Dollar revenue in the quarter and they feel it may find it difficult to top 10% revenue growth in the current financial year.

TCS reported over 9% year-on-year growth (down 0.4% sequentially) in net profit for the April-June quarter at Rs 6,317 crore, beating analysts estimates. Revenue rose 3% quarter-on-quarter to Rs 29,305 crore.

Its operating margin, a real indicator of the company’s performance, was at 25.1%, versus 26.1% in Jan-March, as wage hikes effective April 1 and currency headwinds, were offset by operational efficiencies.

“We believe TCS’s lower constant currency growth of 3.1% in the first quarter implies sub-10% growth for FY17 in constant currency terms with added risk from Brexit in banking, financial services and insurance (41% of revenue),” said Sandip Agarwal of Edelweiss Securities.

The company’s dollar revenue in the last fiscal year rose 11.9% in constant currency terms.

N Chandrasekaran, CEO and MD of TCS said on Thursday that the company was watching developments after Brexit and based on its interactions with key customers, there was no specific caution to report yet, although things are developing as we speak.

Phillip Capital’s Vibhor Singhal also said that while TCS delivered an all-round performance after six quarters of muted performance, the company would still require compounded quarterly growth rate of 2.8%, to achieve 10% growth in FY17, and that may be difficult.

“Also, the 120bps of the operational efficiency gain in margins does not appear to be sustainable going ahead as most of the levers like utilization (at peak level when last reported) and attrition (lowest in last eight quarters) have already been utilized,” said Singhal.

TCS continues to see pricing pressure due to increased competitive intensity in legacy business, noted Shashi Bhusan of IDFC Securities, adding increased use of subcontractors due to visa challenges and pound-sterling depreciation would add to margin pressure. 

At 10:00am, TCS shares were down 1% at 2,495.50 on the BSE, while broader markets were trading marginally higher. The stock has declined 1% in the last three months, while Sensex, gained 8.3% in the same period.