Home / Market / Mark-to-market /  The odds are stacked against TCS’s ‘FY15>FY14’ statement

Tata Consultancy Services Ltd’s (TCS’s) shares have recovered nearly all the losses since it told analysts that growth in the March quarter could be lower than the preceding quarter. Analysts and investors have taken comfort in another statement the company made—growth in 2014-15 will be better than in the just-concluded year.

Can this statement be taken as a given? Even in the last year, TCS had said that growth in 2013-14 will be higher than growth in the preceding year. On a like-to-like basis, the company is unlikely to end up with materially higher growth in FY14.

Based on TCS’s comments on the March quarter, the company is expected to end FY14 with revenues of $13.45 billion, resulting in growth of 16.2% over 2012-13. This is considerably higher than the reported growth of 13.7% in 2012-13. But like-to-like growth, or growth in constant currency terms, stood at 16.2% in 2012-13. In FY14, adjusted for currency movements and inorganic growth, the company is expected to end up with growth of around 16.4%. (The company doesn’t report year-on-year growth in constant currency terms on a quarterly basis; the 16.4% growth number is based on estimates by JPMorgan and IIFL Institutional Equities.)

A mere 20 basis points differential in growth hardly counts as a convincing beat.

“Even if the company reports organic constant currency growth of 16.4%, it will still be a big mismatch vis-a-vis the bravado it displayed when it asserted that growth will be higher in FY14. The company will face a bigger struggle to match its statement on growth this year," said an analyst with a leading institutional brokerage, who declined to be named.

His estimate of constant currency growth for FY14 is between 15.5% and 16%; but he adds that calculating this number involves some assumptions, and is open to interpretation. Having said that, it’s certain that, whatever the calculation method, growth in FY14 is unlikely to be materially higher than FY13.

As pointed out earlier, the law of large numbers is catching up with large IT companies. Cognizant Technology Solutions Corp.’s measured guidance for revenue growth in 2014 reflects this, despite its optimism about underlying demand. It expects organic revenue to grow by 15.9% this year, lower than the 19% organic growth in 2013.

“We just think that the brute reality of the base effect is beginning to play out. This factor, we believe, should be on investors’ minds as they attempt to put growth numbers to the company’s optimism," analysts at JPMorgan India Pvt. Ltd said in a recent note on TCS to clients. In contrast, some overly optimistic analysts have projected revenue growth rates of around 20% for TCS in 2014-15. Even achieving growth of 16% in organic revenues will mean an exceptionally strong first half, where quarterly growth averages 5%.

Given this backdrop of an ever-increasing and high base, the JPMorgan analysts say it makes more sense to look at incremental revenues being added by companies such as TCS and Cognizant. Both companies stand tall in this regard, and have even beaten Accenture Plc (despite a smaller base) in 2013. Also note that growth at the other large IT companies—Infosys Ltd and Wipro Ltd—has been anaemic.

On incremental revenues, TCS should easily surpass the growth in previous years. Using this measure, it has been on a growing curve even in this fiscal year. The problem, however, is that the Street takes TCS’s statement that this fiscal year will be better than the last to mean that growth will be higher in percentage terms. It might make sense for TCS to correct this perception, given the way things have played out in FY14.

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