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TCS slumps 7% after company misses Q2 earnings estimates

TCS's headcount stood at 5,28,748, a net addition of 19,690 employees sequentially. Net employee additions remained strong for fourth consecutive quarter. (Photo: Mint)Premium
TCS's headcount stood at 5,28,748, a net addition of 19,690 employees sequentially. Net employee additions remained strong for fourth consecutive quarter. (Photo: Mint)

  • TCS expects supply-side challenges to persist for the next 2-3 quarters, which would weigh on margins in the second half even though normalisation of salary hikes and revenue growth-led operating leverage may drive margin expansion

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MUMBAI: Shares of Tata Consultancy Services Ltd tanked 7% on Monday as several brokerages reduced earnings estimates for the IT major after the company reported lower than expected results for the September ended quarter (Q2) and guided for a soft margin outlook.

The stock hit a low of 3,660 apiece on the BSE, down 6.9% from previous close. At 1015am, the scrip traded at 3,727.

TCS reported a 2.9% sequential rise in dollar revenue for July-September, below analyst estimates of 3.7%. Revenue growth was impacted by moderation in continental Europe, APAC and the Middle East region. Profit after tax grew 29% year on year to 9,700 crore, again less than estimated.

EBIT margin expanded 10% quarter-on-quarter to 25.6% compared to analyst estimates of 26.2% expansion. Supply-side challenges, higher subcontracting expenses (partly due to travel restrictions) and adverse currency movement restricted margin expansion. 

The company's management expects supply-side challenges to persist for the next 2-3 quarters, which would weigh on margins in the second half even though normalisation of salary hikes and revenue growth-led operating leverage may drive margin expansion.

The company’s headcount stood at 5,28,748, a net addition of 19,690 employees sequentially. Net employee additions remained strong for fourth consecutive quarter. TCS recruited 43,000 freshers during the first half of FY2022. Attrition rate at 11.9% was lowest in the industry, but up a significant 330 bps QoQ. The management expects that attrition rate would stay high for the next 2-3 quarters due to strong demand environment.

The total contract value (TCV) of deals in the September quarter stood at $7.6 billion, led by increased sales in North America to financial services, retail, and manufacturing clients.

Brokerage firm Emkay Research has cut its FY22/23/24 EPS estimates by 1.2%/0.3%/0.3% after factoring in the second quarter performance miss. The operating performance miss for the second consecutive quarter and rich valuations will weigh on stock performance. It has maintained hold rating on the stock and cut its price target by 6% to 3,700 a share.

Prabhudas Lilladher said its EPS cut stands for 1.4% for fiscal 2022, estimates largely remain intact for FY23-24.

Brokerage firm Motial Oswal has reduced its EPS estimates by 2%/4% for FY22E/FY23E. The brokerage firm expects 14.3%/18.4% USD revenue/EPS CAGR over FY21-23E. It has cut target price by 4% to 3770 with maintaining neutral ratings on the stock.

“We remain positive on the company, given its strong growth outlook. But high valuations leave limited room for disappointment. A miss on estimates in 2QFY22, coupled with a soft margin outlook, can result in near term pressure on the stock," Motilal Oswal added.

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