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Business News/ Market / Mark-to-market/  Is the TCS stock a safe haven?
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Is the TCS stock a safe haven?

The economy has hardly inspired confidence and it isn't surprising that investors are looking to IT stocks such as TCS as a safe haven

As is often the case with a quality IT services stock such as TCS, it continues to benefit from the lack of good alternatives in the rest of the market. Photo: MintPremium
As is often the case with a quality IT services stock such as TCS, it continues to benefit from the lack of good alternatives in the rest of the market. Photo: Mint

Ahead of Tata Consultancy Services Ltd’s (TCS) March quarter results, its shares traded at 2,582.8 apiece on the National Stock Exchange. After the company reported revenues that were far below street estimates, they fell to a low of 2,427. The worry, of course, was that the weak revenue run rate at the end of fiscal 2015 would impact growth in the new year.

But now, all seems to be forgotten. TCS shares trade at 2,623.9 apiece, even higher than pre-March quarter levels. Could it be that a significant revival in demand is on the cards? Not at all. The most aggressive estimates among large institutional brokers put revenue growth in the June quarter at 4.4%. The average for five of these brokers is at 4.1%, which is far from exciting, considering that the June quarter is among the strongest in the year for information technology (IT) services companies.

What this also means is that growth in dollar terms could end up being less than 10% for the year till March 2016 for TCS, after adjusting for incremental inorganic revenue. Of course, cross-currency movements would have eaten into dollar revenues, adjusted for which, growth is estimated to be only about 12-13%. For a stock that’s trading at 22X estimated earnings for FY16, this is fairly weak growth.

So what explains the resilience in the company’s stock price?

As is often the case with a quality IT services stock such as TCS, it continues to benefit from the lack of good alternatives in the rest of the market. The domestic economy has hardly inspired confidence and it isn’t surprising that investors are looking to IT stocks as a safe haven.

The problem, however, is that they could end up being disappointed if the companies report muted or unexciting growth in the coming quarters.

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Published: 07 Jul 2015, 08:13 PM IST
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