Investors need not worry about TCS stock, co still outperforms IT peers

Tata Consultancy Services shares dropped as much as 5.6 percent after the company’s December quarter profit when adjusted for other income, as well as operating margin, were seen lagging expectations.

TCS said late on Thursday quarterly consolidated net profit surged 49.6 percent to Rs 5314 crore. So whileTCS’ revenues and operating margin were below expectation, net profit stood higher than estimates on account of healthy forex gains.

Shares in India’s top software services firm were trading down 5.3 percent in afternoon trade.

The investor darling today recordedits worst percentage loss since October 17. However, the stock had ralliedalmost 10 percent in the run-up to its results so far in the year 2014.

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Thestock may take a breather in the near term as it saw massive move through 2013 (up over 70 percent) and the run-up over the last week, said CLSA in a report. “Investors will likely stay invested in the sector leader- TCS,” it added.

Though the software company reported a net profit of Rs 5,314 crore for the quarter ended December, its quarterly revenues at Rs 21,294 crore were marginally lower than analysts estimates.TCS also missed operating margins forecast for the quarter.

“TCS’ 3QFY14 constant currency revenue growth of 2.1% QoQ (estimate of 2.6%) and volume growth of 1.8% (v/s estimate of 2.7%) were disappointing,” said brokerage Motilal Oswal in a report.

However TCS’ Ebit margins at29.8 percent in the December quarter (against30.2 percent in Q2) was far superior to Infosys, whose operating margin rose to 25 percent from 23.5 percent in Q2.

Moreover, had TCS not invested part of the margins back into the business, operating margins would have been higher by 70 basis points, chief executive and MD N Chandrasekaran said on Thursday, after announcing the company’s results.

The TCS management also sounded bullish about FY15 and indicated thatdespite likely sluggishness in domestic revenues for another couple of quarters growth in FY15 will be better than FY14. Rising trend in Digital Technologies is a key factor driving discretionary spending and the segment can be over a billion dollars in revenues in 2-3 years time.

“While TCS will continue to lead revenue growth, weakness in India geography may persist for some time, and clip outperformance to peers. We expect some correction in the reaction to the results following a non-spectacular set of numbers. Valuations keep us Neutral on TCS with a strong preference for Infosys,” said Motilal Oswal.

According to Nomura, the IT major’s Q3 results were a tad below expectations on growth and margins, though it is not a concern, as growth in geographies out of India remained strong and management’s outlook for FY15 growth is strong. The brokerage believes that margin miss was largely on sales investments to drive higher growth.

Reiterating a positive outlook on TCS, Nomura believes that it is best placed than its peers in a demand upturn scenario to benefit from both cost efficiency drive and an improved discretionary spend outlook.

“Any near-term correction on the back of 3Q results and/or recent rally (up 16 percent over last month) would provide a good opportunity to accumulate the shares,” it said in a note. It has upgraded target price on TCS to Rs 2,600 from Rs 2440.