Home / Markets / Mark To Market /  TCS pours cold water on investor hopes

Shares of Tata Consultancy Services Ltd (TCS) have lagged behind those of peers such as Infosys Ltd and Wipro Ltd by a mile in the past year. Even so, the TCS stock is about 47% higher compared to pre-covid highs. Investors are betting on high growth in FY22 and FY23 after the pandemic flattened the revenue growth curve in the previous fiscal.

But the largest IT services firm in the country has disappointed on growth in the June quarter. Revenues grew only 2.4% in constant currency terms sequentially. “Considering that the June quarter is a seasonally strong one for the IT sector, and given the high growth expectations of investors, a mere 2.4% growth is dismal," said an analyst at a domestic institutional brokerage, requesting anonymity.

The company has been quick to point out that growth was dragged down by the India business, which was impacted by the second covid wave. In core markets, i.e. excluding regional markets, growth stood at 4.1%, it said.

Optical illusion
View Full Image
Optical illusion

But here is the trouble with this assessment. Investors value the company’s shares for its entire portfolio, and not just so-called core markets.

“There have been times when the India business has delivered far higher growth than core markets. But growth metrics haven’t been separated out during those occasions," says the analyst.

On a year-on-year basis, growth appears strong at over 16%, although that is because of last year’s low base. The two-year compound annual growth rate (CAGR) works out to around 4.5%, which is lower than the pre-covid growth rates the company enjoyed.

Earlier, it was assumed by most analysts that the Street’s high revenue growth expectations for FY22 will be easily met because of the low base effect—after all, TCS revenues had declined 0.8% in constant currency terms in FY21. But in order for the firm to meet these expectations, revenues need to grow at least 3% in each quarter on a sequential basis for the next three quarters. If growth stood at merely 2.4% in a seasonally strong quarter, there could be some question marks on growth rising to higher levels in the weaker second half of the year.

Of course, with the stock markets flush with liquidity, TCS shares may still find takers in those who continue to hope for a better tomorrow. Analysts at Ambit Capital have pointed out that TCS’s valuations assume growth of 12% each year for the next 10 years, which is a very tall ask, given its recent growth history.

Meanwhile, the TCS management’s commentary continues to be upbeat, and deal wins continue to be strong.

“Our deal momentum remains strong across markets and verticals and the softness seen in India is a one-off; we expect the India business to bounce back. Our strong deal pipeline will help us achieve our target of double-digit revenue growth this year," the management said in a press conference.

But as it is said, the proof of the pudding is in the eating. Strong deal wins need to reflect in stronger revenue growth sooner than later. Investors also need to watch out for the impact of higher attrition and wage inflation on margins. The management said it has managed with higher attrition levels in the past, and isn’t perturbed about its attrition rates, which are still in single digits.

For investors, however, who have priced IT stocks to perfection, any threat to revenue and earnings estimates can’t be taken lightly.

Know your inner investor Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Take the test
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout