Experts divided on TCS margin numbers, say stock will rise

Independent industry expert Moshe Katri said it is a matter of wait-and-watch to see any signs of weakness due to Brexit. Below is the verbatim transcript of Karan Taurani and Sarabjit Kour Nangra, Moshe Katri and Girish Pai's interview to CNBC-TV18's Kritika Saxena and Reema Tendulkar. Reema: How are you reading TCS Q1 numbers?A: The revenue numbers are tad above our expectations. So they look good. The margins are a positive surprise because given this quarter there was a salary hike and the visa cost impact, and despite that the margins have declined by just 60 basis points. And they also had the rupee headwind which was there this quarter. So, margins have actually done very well above our expectations.Reema: What should be the reaction in the stock tomorrow?A: It could be a mild positive reaction in terms of stock price, but not any major changes in terms of earnings upgrade or something of that sort. Kritika: What about you? As far as the margins are concerned, as Sarabjit was pointing out, significantly better than what we were expecting. Are you expecting a positive reaction from the stock tomorrow?A: As I said, there could be an earnings upgrade in terms of single digits, but nothing major as such.Kritika: How are you reading the numbers, it looks like a beat across the board. Specifically the margin figure and the constant currency growth coming in at 3.1 percent, you expect the street to react significantly positive tomorrow?Nangra: Number wise yes, it is slightly less than my expectation on the dollar part of it. We were expecting four percent, so it is 3.7. So, there is a slight disappointment but they have covered up pretty well in terms of margins and definitely net profit coming in significantly than what I was expecting.So, definitely I believe that given the underperformance that the sector and the stock has seen probably there could be some positive uptick happening tomorrow.Kritika: You have gone through most of the details with respect of the exact revenue growth in Latin America and BFSI do you believe that from a vertical and a geography point of view the problem areas as I asked Karan, like insurance, like Diligenta, like Latin America and Japan do you believe that the problem areas are now cleared out and the company has at least put those issues with respect to independent geographies and verticals behind them?Nangra: Yes, seems like and as the management also said and possibly going forward it's negative impact on numbers should reduce going forward.Kritika: You have gone through most of the numbers let me get your take on the volume growth of about 3.4 percent.Katri: A couple of thing I would say that management has been talking about expected improvements this fiscal year in their financial services business. It seems that gradually taking place. I would say that sequential growth by regions also looks pretty healthy. If anyone was really working for any signs of weakness because of Brexit, I would probably say it’s too early to tell. We have look for management commentary and visibility, management commentary on earnings before income tax (EBIT), expected EBIT margin for the rest of the year and I believe in the past they did say that they are comfortable with the range of 26-28 percent. So far based on what I have seen the numbers look pretty healthy and again we have to wait for the conference call, we have to wait for more clarification in terms of the moving parts and margins.Kritika: Would you see that they shows a strong margin trajectory given the fact that the company has several levers including wage hikes that will be pressure points in this quarter?A: No, I think that factors is going to be a big deal, so cross currency gave you some tailwinds and I don’t know if it was 70 basis point maybe it was higher if you give me that number I will be able to answer the question probably bit better.Kritika: What is your initial take on the Tata Consultancy Services (TCS) numbers? As far as the margins are concerned, constant currency growth is concerned, how is it looking like and how would you expect the stock to react tomorrow? Pai: I think the biggest surprise positive has been on the margin front. We were expecting 24.2 percent. The EBIT margins come above 25 percent. Probably, a couple of things that could have worked in the company’s favour, one they had already stated that they would apply for just a third of the visa’s that they applied for last year. So, probably they have saved up something on the visa front, cost front. Second thing is, last year they had invested about 150 basis points in various things, in digital, in terms of setting up collaborative facilities with customers, getting people with niche skills; maybe they have cut back on that going into the first quarter of the year plus we have seen substantial amounts of tailwinds come through on the currency front because on constant currency number it is 3.1 and dollar number it is almost 3.7 percent, almost 60 basis points of tailwind coming through on the currency front. So, all these things have probably contributed to be 25 percent plus EBIT margin but revenue is definitely a miss which would mean that the street is going to probably cut their revenue numbers going into the next few quarters because if the first quarter is just delivering 3.1 percent constant currency growth, one needs to worry about the full year numbers. Full year numbers are a low teen kind of a number if I go by consensus expectation. So, I think that will get cut, maybe the EBIT margin numbers will probably strengthen a bit. Net-net, I don’t think the stock is going to react very much on these particular numbers.Reema: Just elaborate a little more about the volume as well as on the constant currency. We take your point that the topline growth at 3.7 percent was aided by the euro as well as the Japanese appreciation in the quarter gone by but volume growth at 3.4 percent is much lower than the 4.8 percent that we had in the prior year in Q1 of FY16 and even in constant currency a 3.1 percent is lower than the 3.5 percent that we had in Q1 of FY16. What were your own estimates that you are saying that this was a disappointment, yes, it is significantly lower but give us some more color on that and even your own estimates? Pai: We were expecting constant currency growth of 3.9 percent and were expecting tailwinds of just about 10 basis points to deliver a 4 percent quarter-on-quarter (QoQ) US dollar growth. So we were not expecting this kind of tailwinds to come through from the cross currency side. So, constant currency growth is definitely a disappointment and I think that could be the case with consensus expectations also when I look at others on the street. I don’t think they were building in 3.1 percent, probably much higher number is what I probably see. So, that will be a disappointment.As I said, the biggest positive is the EBIT margin number. The negative that I do see is BFSI growth which is something like 1.7 percent QoQ which goes against the commentary that the company has been giving both last quarter and even after that where they have been fairly positive on BFSI growth, they have been calling it a momentum vertical whereas most others in the market be it the others like Wipro, HCL Technologies, Cognizant, Accenture have all being calling out problems in the sector especially with European financials. So, looks like this commentary has probably not played out in this particular quarter and probably they will have to do a lot of explaining as to why BFSI is just turned up 1.7 percent because they said insurance will probably kind of stabilise and things take off from here at least not deteriorate. So, we need to check up what has led to this poor growth vis-à-vis the full company growth in one sense.