Hyderabad: Tata Consultancy Services Ltd reported revenue for the June quarter that was materially below the Street’s estimates. Revenue stood at $5.49 billion, an increase of merely 1.6% over the seasonally weaker March quarter. Analysts at Jefferies India Pvt. Ltd and Kotak Institutional Equities had estimated revenue growth of 2.6-2.7% in dollar terms. A miss of about one percentage point sequentially is considered huge by the Street, and has historically resulted in sharp declines in valuations.

Year-on-year growth in revenue fell to 10.6% in constant currency terms in June, from 12.7% in the March quarter. Apart from the life sciences and healthcare vertical, which grew revenues by 18.1%, all other industry verticals saw only single-digit growth in revenue. Growth was much stronger across verticals in the March quarter.

Besides, TCS reported an operating profit margin of 24.2%, slightly lower than estimates of Jefferies and Kotak. This miss on revenue growth and margins is likely to result in downgrades by analysts in earnings estimates. In the first quarter, TCS reported a net income of 8,131 crore, a year-on-year growth of 10.8%. But thanks to the company’s buyback which reduced its equity capital, growth in earnings per share rose 13% year-on-year.

The company management said on a call with analysts that revenue was softer than what it had envisaged at the beginning of the quarter.

The revenue performance is particularly disappointing in the light of the large deal wins TCS has been reporting for many quarters now. As it turns out, it reported deal wins worth $5.7 billion in the June quarter, too, higher than the $4.9 billion in the year-ago period.

As one analyst put it, TCS’s book-to-bill ratios have deteriorated significantly, referring to the proportion of the company’s order book that translates into revenues that are billed.

Growth at the biggest business vertical—banking financial services and insurance (BFSI), which had witnessed a recovery in the previous fiscal—moderated to 9.2% in June from 11.6% in the March quarter.

“We think weak spending has already started to reflect in weaker outlook for tech budgets, which for 4 of the large US banks is expected to grow slower at ~4% in CY19F vs ~8% in CY18," analysts at Nomura said in a note.

Growth in another large business vertical—retail and consumer packaged goods—dipped to 7.9% in June, from 9.9% in March. Together, these segments generated 47% of the company’s revenues last fiscal.

A more sanguine view is that a high base effect has caught up with TCS. The growth rate of about 12% in the preceding two quarters came off a base where growth was happening at around 6-7%. The June quarter growth of 10.6% comes on the back of a higher base of 9.3% growth in the year-ago period.

Still, all of this raises questions about the double-digit growth assumptions that investors are banking on for the current fiscal. “Led by a soft start in Q1, we see US dollar revenue growth being downgraded for FY20E," an analyst at a domestic broking firm wrote in a note to clients.

On the company’s part, the management wants to wait for another quarter (Q2) before commenting on its growth outlook. The weakness in the BFSI business has been more pronounced, the management told analysts.

But with healthy order inflows and deal pipeline the management sees positive momentum in revenue growth continuing. “If Q2 comes in strong, then we are set for double digit growth," Rajesh Gopinathan, TCS’s chief executive officer and managing director, told analysts.

As such, all hopes are pinned on the Q2 performance, because the second half of the fiscal year tends to be soft in terms of demand growth.

The silver lining is that TCS hasn’t given up hopes of a revival in growth rates. In a sign of growing confidence about future growth, the company stepped up hiring, adding 12,356 personnel, the highest in the last five years. “We are gearing ourselves for the demand we see out there," Gopinathan told analysts.

Even so, given the notable outperformance of the TCS stock and its premium valuations (reflecting its superior growth profile) investors may as well wait for further clarity on the growth outlook.