In an interview to CNBC-TV18, Girish Pai, Head of Research at Nirmal Bang Institutional Equities shared his reading and outlook on TCS and overall IT sector.
Below is the transcript of Girish Pai’s interview with Latha Venkatesh and Sonia Shenoy.
Latha: What is your call on Tata Consultancy Services (TCS)?
A: It is very difficult to predict near-term performance but the weaker than consensus constant currency growth kind of ties in with our cautious view on the sector. We think that industry growth is going to be between 8 percent and 10 percent in US dollar terms over the next two to three years which is something like 300-400 basis points lower than where the current consensus expectations are.
We think that if you look at yesterday’s number that came out from TCS, post the numbers we have actually cut revenue growth from about 11 percent to about 8.5 percent for FY16 in US dollar terms. We think that this kind of heralds, probably single digit growth for the Indian industry as a whole from here on. So the industry has actually grown in 100 percent range, 15 years back then fell to something like 40-60 percent a decade back then came down 20s and then late teens, low teens and we are probably going to a territory where we are going to see single digit growth.
Sonia: You said that you have cut the revenue growth expectations and you are cautious on the IT sector as a whole. What about TCS itself, what is your price target and what do you think could be the trajectory of the stock in the next three to six months?
A: We initiated coverage on the sector three months back with a cautious view on the sector and a sell on TCS. So, we continue to maintain our sell. Post yesterday’s number we have reduced our FY17 earnings per share (EPS) numbers and on that we have a price target of Rs 2,173 which is almost like 14 percent lower than yesterday’s close.
Sonia: Would you not be enthused by the commentary from the management as far as the digital business is concerned. They did say that they are likely to outperform their digital revenues of around USD 3-5 billion in the next few years. Would that not enthuse you?
A: Digital just forms about 2.5 percent given by the company’s commentary. I don’t think that is going to move the needle very much for the company. The fact that it revealed the data point which was not known to the market is interesting, but Accenture is talking about 17-20 percent exposure there and it is growing very fast on a very large base, that is almost like USD 6 billion versus a USD 2 billion number that we talked about for TCS. So, it is interesting but the traditional services, the non-digital part is a very large component, 85 percent and that is not growing at a fast clip.
Latha: Would you extrapolate and lower the EPS for any of the other companies because of TCS?
A: We already have probably the lowest EPS numbers on the street across the board for various largecap IT companies. Probably we will have to revisit them after yesterday’s numbers of TCS.
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