TCS issues revenue growth warning, spooked investors pummel shares down 4%

Shares of Tata Consultancy Services fell nearly 4percent today after the company in a conference call on Friday warned that its October-December revenue growthwill be impacted by seasonal trends.

“Q3 2015 revenue expected to be in-line with seasonal trends. Retail, Manufacturing and Hi-Tech likely to see impact of holidays and furloughs,” TCS said in an investor presentation today. It also said its banking, financial services and insurance vertical will continue to be impacted because of the global slowdown.

According to a report on CNBC-TV18, the company said it was more positive at the start of the year and expressed difficulty in predicting the sentiment at this point.

The company said telecom and smaller verticals are likely to grow better than its average growth. On geographies, demand environment in the North America is in-line adjusted for seasonal weakness. It expects Europe businesses to grow better than the average. On the UK business, it said the region will remain weak due to seasonality factors and the hit on insurance.

The company is expecting a slight uptick in realisations and a 10-20 basis points positive impact due to dollar strengthening. However, it expected a negative 220 basis point impact due to cross currency headwinds.

Reacting to the earnings warning by the company, some of the brokerages have revised downwards the share price target for the company.

“We accord a premium to TCS as compared to peers. In the past several quarters, TCS has reported industry - leading growth rates with sustained margins,” Kotak Institutional Equities said in a research note today. The brokerage has reduced its price target from to Rs 2,786 from the earlier Rs 2,838 based on the FY16 estimates.

The brokerage has noted that growth will be muted because of furloughs and the sentiment is weak, TCS has not seen any cancellations or deferrals of projects. “To that extent, we believe that, the weakness is transient rather than structural. We will become cautious if there are project cancellations or deferrals from a few clients, going ahead,” it has said.

Kotak has a buy recommendation for the stock looking at the 14 percent upside. However, it sees the stock remaining weak until the third quarter results.

Goldman Sachs, meanwhile, has maintained a buy rating, estimates and target price for the stock as it is cautiously optimistic amid the seasonally weak quarter. It said the this financial year may not be better than the last financial year for the company and more visibility on 2015-16 is possible only after the results, a CNBC-TV18 report said citing the the global brokerage.

Deutsche Bank has maintained the target price at Rs 3,170, though it expects multiple headwinds to hurt the company’s December quarter. Barclays, meanwhile, has cut the target Pprice To Rs 2,900 From Rs 3,015 after the company’s warning, CNBC-TV18 reported.

Brokerage house Motilal Oswal has said that TCS’ cautious commentary will have a bearing on the sector. Nasscom’s outlook of acceleration in exports growth is much tougher following the miss at Cognizant Technology and TCS, it said, cutting FY16/17 EPS for TCS by 4.3 percent and 2.6 percent.

“We see likelihood of TCS’ growth leading peers by a lesser margin going forward,” the brokerage said in a note.