TCS results: Upbeat commentary, downbeat performance in March quarter
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Often, Tata Consultancy Services Ltd (TCS) and its investors don’t see eye to eye. The company’s March quarter results announcement was no different. Revenue grew 1% sequentially in constant currency terms, lower than analysts’ estimates of around 1.6% growth. Worryingly, revenues in the mainstay North American region fell by 1.8%, and those of the key banking, financial services and insurance (BFSI) vertical fell 0.4%.
Still, chief executive officer (CEO) Rajesh Gopinathan said, “We are quite happy with the way we have ended the year.” He added on a call with analysts that the outlook for the BFSI segment remains positive, and that thanks to large deal wins, it may be only a matter of time before the expected growth comes in. TCS has been saying for the past few months that things are looking up in the US and particularly in the BFSI segment. Over 40% of its revenues come from the BFSI segment, while the North American region accounted for 54% of revenues last year.
But after the March quarter performance, investors are likely to question the company’s optimism. As the chart alongside shows, year-on-year growth rates have fallen significantly at TCS in the past year. Besides, operating profit margin, too, has fallen below its targeted range of 26-28%. The result of this double whammy was that earnings per share grew by just 8.3% last year.
With the rupee having appreciated sharply compared to the average rate in fiscal year 2017 (FY17), margins are expected to be under further pressure in the new fiscal year. What’s more, thanks to the many changes in H-1B visa rules and policies, costs of providing on-site services to clients are also expected to rise. As such, earnings can be under pressure in FY18. Against this backdrop, TCS shares trade at around 16 times one-year forward earnings.
And while CEO Gopinathan said that he expects FY18 to be incrementally positive, things could turn out to be particularly dire, depending on new visa rules. “We see near-term impact on decision-making due to immigration-related issues, even as companies are denying this. We expect 1QFY18 to start slowly and do not build growth acceleration in FY18,” analysts at Nomura Research wrote in a note to clients. Some of the possible impact of new visa norms is detailed here: bit.ly/2ngI48H.
And unlike TCS’s upbeat post-results commentary, most other technology companies including Accenture Plc. have guided for slower growth in the new fiscal year. Besides, while Infosys Ltd tried to soothe investors’ nerves by outlining a detailed capital allocation policy, TCS said it will stay with its existing payout policy.
In sum, there’s nothing much to like in TCS’s March quarter results announcement, except perhaps for the management’s hopeful commentary. But given the fair bit of divergence between the company’s outlook three months ago and its actual performance, investors would do well to tread cautiously.