Tata Consultancy Services (TCS) for its fourth quarter (January-March) reported mixed earnings. Profit fell 2.5 percent sequentially to Rs 6,608 crore on lower-than-expected growth in topline. Revenue during the quarter declined 0.3 percent to Rs 29,642 crore QoQ, dented by subdued growth in key segments like BFSI and retail. However, revenue in dollar terms increased 1.5 percent to USD 4,452 million compared with the previous quarter and grew 1 percent in constant currency.
In an interview to CNBC-TV18, Apurva Prasad HDFC Securities, Sarabjit Kour Nangra Angel Broking, Karan Taurani Dolat Capital, Moshe Katri MD, Wedbush Securities and Urmil Shah IDBI Capital Markets & Securities discuss the outlook for the company going forward.
Below is the excerpt of the discussion.
Reema: How would the numbers compare with the Angel estimates?
Nangra: We were on the higher side. We were looking at in terms of margins around 26 percent EBIT margin coming in, net profit estimates were also bid tad higher than what they have delivered. So, for me it is overall lower than expectation I would say.
Margins we were looking at 26 percent, they have delivered 25.7 percent. So, that is something which is kind of positive given that revenue growth is more or less not in sync with what street was expecting but margins have kind of squeezed into being slightly inline. So, that is a positive area, rest I think is lower than expectation.
Reema: Urmil your thoughts?
Shah: On the revenue front it is inline with our expectation about, 1 percent constant currency growth but there is a miss on margin front. We were expecting margins to remain flattish. It is good that digital has grown well but still the year on year growth of 23 percent is slower than the growth for the full year.
One positive part is that the USD 100 million clients and USD 50 million clients have continued to see an addition.
Reema: Do you get the sense that FY18 might be a better year for the company? FY17 the company has delivered 8.3 percent in constant currency, your own estimates for FY18 and would there be any changes that you would make to the EPS estimates?
Shah: For FY18 we are expecting about 8.5 percent growth on a constant currency terms. To that extent on the revenue front there doesn’t seem to be a change required. For EBIT for next year we are expecting a 25.6 percent for FY18. So, we will see what is the kind of investments in frontend and sales and marketing they would require.
Reema: Do you believe that the company will lower its margin guidance band? Will that be taken negatively or do you think it is priced in?
Nangra: I expect some kind of a caution on margin front given the backdrop of what is happening at the US front. I am expecting a lowering of guidance in terms of margins. However in terms of factoring, I guess the valuations if you look at in IT space, I guess the stocks have already underperformed enough to factor in that. So, what kind of a margin dip Infosys has given and if that comes through I think the stocks are already kind of factoring in that for the next year I guess.
Reema: You said that the numbers are largely in line with your expectations, so the stock reaction, according to you, what should it be?
Taurani: Stock reaction would not be a significant one. Given the negative sentiment in BFSI and US not doing well, you could see the stock going down by about 2-3 odd percent. But, nothing major as such in terms of downside because in term of valuations if you see, the stock is already trading at about 15.5-16 times FY10 earnings per share (EPS) and we believe that largecap IT vendors, as the growth is clearly coming down, we believe these are fair valuations and do not offer much scope for downside from current levels at least.
Reema: Is there a case for the company to lower its margin guidance band considering in FY17, it has come in at 25.7 percent lower than their own target?
Taurani: You saw Infosys lowering their margin guidance by about 100 odd basis points and similar could be for TCS as well. So, in our estimate currently, we have got an EBIT margin of about 25.5 percent for FY18. You could see that lowering down by 40-50 basis points because there is rupee appreciation which is a major headwind for. As Infosys, even for TCS that would be something which would be factored in. plus, for TCS the visa cost would again be a very high component because they also have a significant amount of onsite base. So, the onsite cost would also have an impact on margins. So, probably it could be a little higher than Infosys in terms of margin impact, but yes, surely we expect the margin guidance to be revised downwards for TCS as well.
Prashant: 8 percent growth this year, 8 percent growth expectation next year, many people make this case that valuations are low, but stocks do well when earnings are expected to grow or earnings estimates are revised upwards. There is no case for that here, not just for TCS but Infosys and maybe others as well. Maybe we will see a small 23 percent reaction tomorrow, but over a period of time, do you suspect stocks can derate?
Prasad: There has already been a fair level of derating if look overall at the sector. If you are comparing vis-à-vis the highs, they are off almost 30 percent in terms of valuations. If you look at net interest margin (NIM) levels, they are off more than 20 percent. So, there has been a fair amount of derating of this sector. The question is really where does the earnings deceleration stabilise? That is really the question to ponder about. So, there are a set of headwinds for the foreseeable future. For the next couple of quarters, we see very clear headwinds, so it is actually a function of where that stabilises. What also is important as what they do on the payout side, that is something in the last one quarter, many of these companies have stepped up especially in the payout side. So that should also to an extent be supporting valuations. But the question really is where does the deceleration in earnings start.
Reema: A lot of hope was based on the recovery of the BFSI vertical considering that US banks had started doing well ever since Trump came in, there was hope that his regulation would be favourable for US banks and that would drive further the spending by the US banks which could benefit companies like TCS considering the high leverage that they have to BFSI in North America. But at least this quarter, the performance appears to be a bit muted. BFSI has declined by 0.4 percent on a quarter-on-quarter basis in constant currency. Would that alter your growth estimates?
Prasad: It is actually quite interesting. The fact that this is quite a contrast to Infosys if you look at BFSI in North America as compared to Infosys where there was actual outperformance. The structural common theme out here between the two that I see immediately is the weakness in the retail and the consumer packaged goods (CPG) segment. That is somehow looking like a trend. But yes, BFSI does matter with TCS with such high share in BFSI. We really need to understand which pockets is this really. It looks more like a North America type of an issue, but we need to really understand probably a bit deeper. It could be the Diligenta part. Diligenta was coming up so, we will probably wait for management commentary on that to take a better call.
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