BackTCS misses muted expectations again in Q3
The company's growth has fallen short of the Street's expectations for six straight quarters now, and investors' patience is running thin
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Tata Consultancy Services Ltd (TCS) on Tuesday said that its performance in the December quarter was pretty steady, barring the sharp decline in its India business. But analysts and investors are growing tired of such assessments. The company’s growth has fallen short of the Street’s expectations for six straight quarters now, and investors’ patience is running thin.
What matters, of course, is how the company’s entire portfolio is doing, without excluding the pockets of trouble. In constant currency terms, revenues rose by only about 50 basis points sequentially. The Street was expecting growth to be around 100 basis points higher. One basis point is 0.01%.
The divergence between expectations and growth is getting wider, and the TCS stock can be expected to correct when trading resumes on Wednesday. The only saving grace is that the stock has already fallen by over 10% since its September quarter results announcement. Still, with no signs of a pickup in growth rates, valuations aren’t exactly inexpensive at 19 times fiscal year 2016 earnings.
Note that year-on-year revenue growth fell to 5.4% in dollar terms, from 11.3% a year ago. While TCS’s growth has declined sharply in the past five quarters, growth of its closest competitor, Cognizant Technology Solutions Corp., has risen. In other words, the drop in TCS’s growth rates can’t be brushed away as an industry-wide trend. There have been some suggestions that TCS’s growth has been hit because it isn’t being flexible enough on the pricing front, in its attempt to protect margins. But the company’s management dismissed this in a conference call with analysts.
A clear trend in the past year has been a pickup in demand for the so-called digital services and a drop in demand for traditional outsourcing services. It appears that the tilt in TCS’s portfolio towards the latter has impacted growth.
The company itself has blamed the drop in growth in FY16 to headwinds in Latin America, Japan, Diligenta and the troubled energy vertical. Barring Japan, each of these business segments have already bottomed out or are close to bottoming out. This should, perhaps, provide some hope of better growth in FY17. But the proof of the pudding is in its eating—unless TCS reverses the trend of declining growth rates in the March quarter, there is no reason for excitement.
Analysts at Kotak Institutional Equities wrote in a 12 January note that FY17 is not shaping up well for the Indian IT services sector for three reasons: “(1) Patchy spends across verticals, (2) Pricing pressure and diminishing returns in the core run-the-business services and (3) Lack of full participation in consulting-led shaping of business opportunities and engagements in digital." They expect growth to drop by about 2-3 percentage points vis-à-vis FY16. This is hardly a great environment for a strong comeback by TCS.
The writer does not own shares in the above-mentioned companies.
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