Revenue miss: How will D-Street react to TCS' nos?

India's largest IT services company TCS missed analysts estimates on the revenue front for the fifth consecutive quarter. Revenue grew by 5.8 percent quarter-on-quarter to Rs 27,165 crore and dollar revenue increased by 3 percent to USD 4156 million in Q2. Reacting to the news, Pankaj Sharma, head - equities, Equirus Securities, says the overall numbers look fine, except for the revenue miss. He does not think the Street will react too negatively on Wednesday if margins, utilisation and attrition numbers are in line or better.

Sarabjit Kaur Nangra, VP-research from Angel Broking and Deepak Shenoy, founder, Capitalmind.in too concur with Sharma's views.Nangra says while the revenue miss is disappointing, but the core matrix drivers in terms of volume has done fairly well. The miss has probably come from currency, she adds.

Dipesh Mehta, IT analyst from SBICap Securities, however, thinks this revenue miss will be taken negatively.

Below is the verbatim transcript of the interview..Reema: Your sense of how the stock will react given the miss on the top line but other numbers look fairly in line? Nangra: Yes, rightly as you pointed out the miss is mainly in the US dollar number and I guess it is a disappointment coming from TCS but if you look at the core metrics in terms of drivers which are the drivers for the business performance in terms of volume and that has done fairly. The miss is probably coming from pricing and currency. So, volume wise they have done fairly well. Margins in line with expectation, bottom-line slightly below expectation. So, overall if I have to put it in a nutshell in fundamental point perspective which deals with only core variables of the business performance then street should not be very disappointed by tomorrow but in the meantime they will also be interested in knowing about the commentary and the business outlook for the second half of the remaining year to foresee how it pans out going forward but broadly on operating metrics they shouldn't be disappointed. Surabhi: If I could ask you about commentary, since you mentioned commentary and it was really the talk about the second half that spooked the market with respect to Infosys and we saw what happened to the stock. Would you fear or would you anticipate that TCS is also going to be extremely cautious about second half or do you think that was a specific one off Infosys event? Nangra: Infosys I have not taken in that a bad perspective in the sense that second half is normally generally weaker and probably in Infosys there is - unlike I am on the optimistic side wherein they probably could be inching upwards or probably doing better than that. So, it was just a general commentary and second half is known to be softer for most of the IT companies. So, what I meant by outlook was as you said client additions are pretty strong for the company, so probably if the commentary for - because TCS has been very confident of beating NASSCOM numbers. So, if the commentary remains stronger and given the operational metrics they have delivered in the quarter I don't think there should be a scope for any disappointment on this stock and its performance actually.Reema: Walk us through anything in the internals that stands out for you, that you would like to highlight? Mehta: My preliminary reading suggest that the revenue growth is slightly lower than what we expected. So, revenuewise there is slight miss, otherwise margin and everything is broadly inline with what we expected. Reema: In the past we have seen TCS react negatively to the miss in the dollar revenue even though they have managed to maintain and meet street expectations and margins and profits, will it be different this time? How much importance will the street give to the 50 basis points miss compared to consensus expectations on the dollar revenue? Mehta: This would be the fifth quarter of revenue miss. So, in that case I think street should not take it very positively in my view. Considering recent performance of the stock I don't expect knee jerk reaction either. However my sense is there would be negative reaction to stock price tomorrow.Reema: Your initial reaction? Shenoy: Initial reaction is pretty good. The numbers are as expected. I do not see any downward surprises. I think the commentary in the conference call at 7 p.m. will colour anything else. The only disappointment has been in revenue both in rupee terms and constant currency terms, 14 percent growth in revenue for a quarter when the rupee fell to 65 to the dollar is a little surprising otherwise, profits have grown over 14.5 percent. That means their margins have marginally gone up in terms of rupees. So, I am okay with that. The rest of it, I have not seen all of the data so, I cannot give you a full picture yet. Reema: But in the last many months, the stock has not done too much. It has been consolidating. So, based on these numbers, do you expect this consolidation phase for TCS to continue? Shenoy: No, that is interesting, because last five days, you have seen continuous lower stock prices on TCS, so obviously I believe that there must have been a expectancy of a fairly bad result, especially after Infosys an perhaps HCL Tech’s warnings. But I do not see that in the results yet. So, I do not think for an immediate reaction, if the last five days were an indication of expectations of bad results that have not panned out, so in that context, the market should go up. I believe these are not exemplary on the upside either. So, I believe the street will probably have a small bounce from here and it will all depend on the commentary about what the future holds. Reema: Your initial reaction on TCS numbers? Sharma: There is some disappointment on the topline growth because we were expecting more like a 4 percent growth in this quarter sequentially. If that is 3 percent I think that is definitely disappointment. I have the first copy of the release and when I see the numbers I think other than that numbers are looking more or less okay. If you look at the EBIT, profit numbers, they are looking largely fine. I think the key thing for them is to talk about the second half commentary because we have seen in the case of Infosys as well that they delivered very good set of numbers but because of the margin which could be down in next quarter and second half and also because of the lower guidance people really didn’t like that result too much. So, more important thing for them is to look at what happens in the management commentary. Overall I think the results are largely okay. Slight disappointment on revenue part in dollar terms but otherwise things are looking fine. Reema: Do you expect the stock to react negatively because the topline has disappointed or you think the street will focus on the other numbers which seem inline? Sharma: It is not a big miss. If the numbers on margins - utilisation, attrition, the final profitability , all those numbers are inline or slightly better. People would probably ignore this miss. It is not big that people should get too concerned. However in conjunction with everything else I think it is still something which would not be liked by the market but if everything else is okay and inline or better people would probably forgive TCS to deliver slightly lower number in dollar terms.