Shares of Tata Consultancy Services were among the top losers on the benchmark BSE Sensex on Thursday; the stock was down over 1.5 per cent on the BSE as its mixed earnings and near-term uncertainty left investors disappointed.
The software services bellwether, which reported earnings for the July-September quarter on Wednesday evening, kickstarts the earnings season for India's information technology sector. Net profit for the second quarter was up 8.7 per cent year-on-year to Rs 11,342 crore and revenue rose 7.9 per cent from a year ago to Rs 59,692 crore. In US dollar terms, while the profit rose 5.6 per cent year-on-year, revenue was up 4.8 per cent. The company also reported an order book of $11.2 billion and announced a share buyback worth Rs 17,000 crore.
Why then are investors disappointed?
Nomura Securities analysts Abhishek Bhandari and Krish Beriwal pointed that the 0.1 quarter-on-quarter dollar revenue growth in constant currency was weaker than consensus expectation of 1 per cent growth. While the order book is holding up, near-term visibility remained low, they added.
"Management noted that certain discretionary projects are being deferred or put on hold as clients prioritize those projects, which have upfront cost savings. Clients are more comfortable with projects with immediate returns. Gen AI projects remain experimental and hence, smaller; though TCS is working on 250 live engagements," Bhandari and Beriwal noted.
Software services exporters like TCS have seen business slow in recent quarters, amid slowing global growth in the backdrop of a sharp rise in interest rates, hawkish central banks and geo-political tensions driven by the Russian invasion of Ukraine. The recent flare up between Israel and Palestine will only add to the worries.
The International Monetary Fund, earlier this week, maintained its global real GDP growth forecast for 2023 at 3.0 per cent, but lowered its 2024 growth outlook to 2.9 per cent from 3.0 per cent. Notably, the IMF cut its growth forecast for the Euro area to to 0.7 per cent from 0.9 per cent for 2023 and to 1.2 per cent from 1.5 per cent in 2024. It also cut growth forecasts for China.
Omkar Tanksale, research analyst at Axis Securities feels TCS' growth rate may slow down in financial year 2024 due to uncertainties in the world's largest economies, although easing up of supply-side constraints should help the company gain some margin expansion in the near-term.
"From a long-term perspective, TCS has built a resilient business model by securing multiple long-term contracts with the world's leading brands. It has also established robust capabilities that will enable it to gain market share moving ahead. However, prevailing uncertainties in large economies continue to pose short-term headwinds to the growth prospects of the company," said Tanksale.
Companies like TCS are confronted with challenges in discretionary spending by clients and delays in ramp up of transformational projects signed earlier due to macroeconomic pressures, say analysts.
"We believe that growth in near-term in export sales is likely to remain soft, while we remain optimistic over recovery over the medium to long-term, unless macro issues further deteriorate ahead and impacts demand beyond near-term," said Sandeep Shah and Deep Modi, analysts at Equirus Securities.
IIFL Securities analysts Rishi Jhunjhunwala and Saurabh Thadani said leakage from deal completions and certain project ramp downs continued to impact TCS' growth. However, they said TCS was better equipped to navigate through the current macro challenges.
The mixed results by TCS weighed on the wider IT stocks on Thursday. In the afternoon trading, while TCS was down 1.6 per cent, shares of Tech Mahindra and HCL Tech were trading around 2 per cent lower. Infosys stock was also down about 1 per cent and Wipro and LTIMindtree were trading down around 0.75 per cent.
