TCS cautious on its BFSI biz, to update investors in Q2

Tata Consultancy Services (TCS) is seeing some sequential loss of momentum in Banking and Financial Services Solution (BFSI) business in US. The company further said it is holding back discretionary spending seen in the segment. TCS has characterized customer outlook in BFSI with utmost caution and says that it will update investors on business trends in the second quarter itself.The pressure in BFSI business, which is a major contributor (nearly 40 percent) to the business, was visible in first quarter’s growth of 1.7 percent. The company has also guided for a slower Q2 sequentially. “(We) have been expecting slower growth from the US, BFSI in particular,” says Ravi Menon of Elara Capital reacting to the above news. Federal Reserve not hiking the rate is impacting net income of banks in the US which is adding pressure on companies and could have led to this cautioning views, he told CNBC-TV18. Elara Capital expects TCS to clock in 9 percent growth for FY17. Margins are expected at 25 percent, lower than TCS’s guidance of 26 percent for the full year on back of movement in currencies. Menon says that while TCS and Infosys are trading at a premium now, the latter is expected to trade at a premium over TCS in the medium-term (mostly after 6 months).“IT stocks have been on a decline as the index rises,” says Sanjiv Bhasin of IIFL. TCS’s profit warning is negative for the entire sector and pressure is expected on largecaps and midcaps both. Previously, Mindtree and Congnizant had released profit warning. TCS might start trading at lower levels on back of this, Bhasin adds.
Dipan Mehta, BSE and NSE Member, said that fundamentals of IT companies have deteriorated. Unless they get volume growth, their profit margins are going to get compressed, he said. A lot of levers of profit are disappearing for IT companies,  he said, adding that it is a challenging environment.

Even micaps are facing the same challenges as largcap IT companies, he said.Below is the verbatim transcript of Ravi Menon’s interview to Reema Tendulkar, Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: This is the only sentence we have the company intimating to the Stock Exchange that it will be meeting investors and that is in the context of Banking, Financial services and Insurance (BFSI) vertical heads holding back their discretionary spending resulting in a sequential loss of momentum. I am just quoting the words to you. What have you made of this? Is this factored in or is this fresh bad news?A: We have been expecting something around not just BFSI but we have been expecting slightly slower growth from the US. BFSI in particular because most banks when they started this year would have factored in rate increase by the Fed mid-year and would have allocated rightly budget factoring that in.Now that didn’t happen because of the Brexit and we have seen that get postponed. Now people are putting the odds of a Fed rate hike end of September as also fairly low. Looks like this whole Calendar Year will pass without rate hike by the Fed. That means the net income by banks in the US would be under pressure and that might have led to some more budget cuts that is possible.Reema: How much should the revenue estimates and the margin estimates for Tata Consultancy Services (TCS) come down for based on what they are guiding?A: We had already factored in just a slightly over 9 percent growth for the year for TCS. We have been expecting that margins will come in at about 25 percent below their guided band of 26 percent; partly on account of the sharp depreciation of pound against the dollar.Sonia: In terms of a stock price what kind of downside do you see on TCS? Because since its numbers the stock has already fallen about 10 percent from the highs of almost Rs 2,700 do you see a further de-rating based on these cautious comments?A: We expect that they should not be trading at a premium to Infosys. Last quarter that again the premium increased because people expected that TCS delivered growth that was ahead of Infosys and that trend would continue. We feel this full year will not be that way. Its incremental revenue growth or the addition for TCS cannot continue at the same rate.Anuj: How much de-rating for TCS from hereon because Infosys gained back all that discount after Vishal Sikka and now we again have TCS trading at a significant premium. So you expect both these stocks now to now trade at par?A: That is what we expect to and we eventually expect Infosys to start trading at a premium to TCS so that will be still about six months one year out.Latha: You would expect TCS to trade at a premium?A: No, Infosys to trade at a premium.Latha: What is the impact on all stocks now? TCS warning is not just a TCS warning, it is a sector warning as well. Is there fresh reverses that we will see in all stocks including Infosys?A: The Infosys bad news is already factored in. People had been given another warning over the investor conference that just happened two weeks back. So, people have factored in most of the bad news for Infosys. I don’t think this is something that will take down the entire sector as such. People have been already underweight IT for some time now, so I don’t think it should have implication on whole sector.Sonia: This is specific to the US business and for TCS that is the largest geography -- North America which grew just 2.50 percent in the previous quarter. How much do you think this North America vertical could slow down going ahead not just for TCS but which are the other companies that have a larger exposure there as well?A: Infosys has an even larger exposure than TCS to the US geography. So we don’t see this as something that will continue. Could be something more client specific similar to what has happened for Infosys with Royal Bank of Scotland (RBS) where it is not their fault but it is just that clients are deciding to change spending because of business reason.