TCS Q2 results fail to excite street; stock tanks 7%

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TCS Q2 results fail to excite street; stock tanks 7%

Tata Consultancy Services shares crashed over 7% on Tuesday as the company’s little lower-than-expected quarterly numbers raised doubts over the software major’s valuations.

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Moneycontrol Bureau

Tata Consultancy Services  shares crashed over 7% on Tuesday as the company's little lower-than-expected quarterly numbers raised doubts over the software major's valuations.

India's largest software services exporter reported a 15% year-on-year rise in second quarter net profit at Rs 2,439 crore, according to international accounting standards. Revenue in July-September was up 25% at Rs 11,634 crore. This was tad lower than analysts' expectation of a net profit of Rs 2,450 crore on revenue of Rs 11,750 crore.
                                                                                                                                         Strong performance over the last two years led to higher expectations from TCS, and the slightly lower-than-expected results was a disappointment.

TCS had raised the bar higher with splendid performance over the past several quarters and September quarter results failed to live up to street's expectations in our view, said Manik Taneja and Priya Gajwani of Emkay Global Financial Services.

"While the company's sequential volume growth was strong at 6.3%, pricing declined by 100 basis points quarter-on-quarter (on the back of 50 bps decline in June quarter and needs to be weighed in the context of management's expectations of improved pricing through FY12)," the two analysts said.

Kotak Securities analysts Kawaljeet Saluja and Rohit Chordia downgraded the stock to "reduce" from "add," saying TCS' results in second quarter were sub par and even though they remained positive on the company's growth prospects, current valuations were not supportive.

Positive comments by TCS about the overall demand scenario, despite it flagging economic uncertainties, however, did encourage some analysts.

"TCS' comments on demand are more positive than its peers, in particular Infosys. Management comments on there being no decision making delays is in direct contrast to Infosys' comments after its results. Infosys had said that while it is seeing no project cancellations, it is experiencing decision making delays," noted Vihang Naik and Varun Vijayan of MF Global Sify Securities.

TCS shares have outperformed its peers so far this fiscal. While TCS is down 5.4% since April, the broader CNX IT index has slipped 14.7%.

Edelweiss Securities analysts Ganesh Duvvuri and Kunal Sangoi maintained their "buy" rating on TCS with a target price of Rs 1,210. "TCS has delivered consistent EBITDA growth of over 20% in the past four years, and is expected to maintain that trend due to strong deal wins and client mining," the analysts said.

MF Global also has a "buy" on TCS. Emkay has a "hold" rating on the stock with a target of Rs 1,060 on the stock.

TCS shares were trading down 7.3% at Rs 1,038.60 on NSE in morning trade.