Like Infosys, Tata Consultancy Services (TCS) reported flattish revenue growth of 0.5% q-o-q in dollar terms on the back of muted volume growth. In rupee terms, revenue growth stood at 6% q-o-q comprising 6.7% growth in international business and 1% de-growth in domestic business.
The volume growth in Q1 FY09 was impacted by material revenue decline from two large BFSI clients. Unanticipated decline in business from a large banking customer and dip in products business due to decision making delays by clients depressed volume growth.
OPM declined by lower than expected 110 bps q-o-q to 23.9% despite the implementation of salary hikes during the quarter and the negative impacts from softer pricing, lower utilization and onsite revenue shift.
TCS witnessed some softness in pricing during Q1 FY09 due to lower revenues from transformational deals and product business.
Concerns and valuation
Though the Q1FY09 performance of TCS was sedate, as expected, and business outlook remains challenging, the stock is likely to outperform in the short-term given the bleak expectations before the results.
Over the last three months, TCS has significantly underperformed the sector especially vis-à-vis similar-sized peers, Infosys and Wipro, due to higher uncertainty about its Q1FY09 performance.
Since April 2008, the stock has delivered a negative return of 12.5% against positive return of 1% in BSE IT and 9% for Infosys. Since announcement of Infosys Q1 FY09 results, TCS is down 16% implying further moderation of expectations.
Q2 FY09 is likely to be a better quarter for the company with improved growth outlook in the two troubled BFSI clients and as also indicated by healthy hiring in Q1 FY09. We rate the stock as BUY with a target price of Rs875 implying 20% upside.