Tata Consultancy Services Ltd’s (TCS) stock has underperformed peers since mid-September, after the company told analysts that it expects a drop in volume growth in the September quarter compared with the 5.3% growth it reported in the June quarter. It had then also said that it expects margins to slip. While things have played out exactly this way, it’s clear that the Street’s fears were overdone. Volume growth was lower, but was still impressive at 4.9%. And considering the fact that the June quarter earnings benefited from an unusually large BPO order, it’s commendable that growth rates haven’t slipped by much.
Margins fell by 75 basis points, a tad higher than Street expectations. But again, this shouldn’t worry investors. Most of the decline in margin was because of the jump in the proportion of onsite revenue, which increased last quarter because of a few large deal starts. Besides, revenue from India rose sharply. Domestic revenue involves a larger proportion of hardware that’s bundled as part of the deal with clients, and hence involves lower margins.
But given that the company has grown steadily in other areas as well, there is no cause for concern. The TCS stock is now likely to regain some of its losses, when markets resume trading on Monday. As it is, Infosys Ltd has poured water on investors’ hopes that it has turned the corner. With TCS demonstrating that its growth as well as the outlook for the future remains strong, it should benefit from a shift in fund allocations within the information technology sector.
Unlike Infosys, TCS’s employee addition was strong at over 10,531 workers. Additionally, thanks to the weak rupee, the company is now open to deals that would have not met its margin guidelines earlier. The company’s chief financial officer S. Mahalingam said that early indications from clients suggest that budgets will not decline, and there remains an appetite for transformational deals.
This is much unlike the commentary from Infosys, which says discretionary spend continues to be under pressure. Clearly, TCS’s relative aggression in the marketplace is leading to superior deal win rates as well as revenue growth.
What’s more, the company says it will maintain margins at last year’s levels of around 27%. TCS has now grown revenue by more than 13% in the first six months of the year, and is leading peers, including HCL Technologies Ltd, on revenue growth. While investors will be keen to reward this, gains may be restricted to some extent by the fact that the company already trades at a hefty premium to peers.