Rub-off effect: Spooked by TCS Q1 results, IT pack suffers losses

The Nifty IT index tanked over 3 per cent in early trade on Monday when compared with a 0.5 per cent fall on the Nifty50 index

Shares of Tata Consultancy Services (TCS) fell 4.7 per cent to close at Rs 3,112 on Monday on the National Stock Exchange (NSE) after the information technology (IT) major reported a 185-basis point (bp) sequential decline in earnings before interest and tax margins to 23.1 per cent for the quarter ended June (first quarter, or Q1) of 2022-23 (FY23).

While the stock was the top loser on Monday, it pulled down the Nifty IT Index, which closed over 3 per cent lower over the previous day’s closing, making it the top loser among sectoral indices on Monday — a day markets closed almost flat.

The 30-share BSE Sensex, which opened on the back foot, witnessed strong buying in late-afternoon trade. However, it could not sustain the momentum and closed 86.61 points, or 0.16 per cent lower at 54,395.23.

On similar lines, the broader NSE Nifty dipped 4.6 points, or 0.03 per cent, to end at 16,216.

The rub-off effect of TCS was seen on other IT stocks.

HCL Technologies, Coforge, Infosys, Mindtree, and Larsen & Toubro Infotech were down in the range of 2.85 per cent to 4.33 per cent, while Tech Mahindra, Wipro, and Mphasis slipped between 1.6 per cent and 2.0 per cent on the NSE.

TCS, the leading IT service provider with presence in banking, financial services, and insurance, communication, manufacturing, and retail, saw its net profit grow 5.2 per cent year-on-year (YoY) and 2.5 per cent sequentially to Rs 9,478 crore in Q1FY23, but missed estimates of Rs 9,850 crore, according to the Bloomberg data.

Revenue for the quarter came in at Rs 52,758 crore, up 16.2 per cent YoY and 4.28 per cent sequentially.
 

While the company’s Q1 revenue was ahead of Bloomberg estimates of Rs 52,486 crore, margins for the quarter came in at 23.1 per cent, down 2.4 per cent YoY. The impact of salary hikes on margins was 150 bps, and that for travel cost was 30 bps.

Analysts at ICICI Securities expect margins to be under pressure until 2023-24 (FY24), resulting in margin contraction of 30 bps between 2021-22 (FY22) through FY24.

New organisation structure — aimed at increasing customer stickiness — is expected to enhance market-share gains. Increase in outsourcing in Europe, vendor consolidation, and deal pipeline, leading to revenue compound annual growth rate of 12.2 per cent over FY22-24 and double-digit return ratios, strong cash generation, and healthy payout are key triggers for future price performance, the brokerage firm said in the result update. However, it maintains a ‘buy’ rating on TCS, with a target price of Rs 3,785 per share.

Analysts at Nomura have lowered dollar revenue growth expectations to 9 per cent YoY, from 10.8 per cent earlier, factoring in sluggish order bookings and cross-currency headwinds.

“We expect TCS to lag Infosys on revenue growth in FY23. We lower FY23-24 (estimated) earnings per share by 1.4-2.5 per cent, factoring in lower revenue and margin assumptions,” the brokerage firm said.

According to Bloomberg data, at 22 (out of 48), the number of brokerages that have a ‘buy’ recommendation on TCS stock is the lowest after October 7, 2020, (or 21 months) when the figure was 21 (out of 47).

During this period, the peak, in terms of ‘buy’ rating, was seen at 32 (out of 50) in August last year. Even as a proportion of the total number of ratings (‘buy’, ‘hold’, ‘sell’), at 45.8 per cent, the figure for ‘buy’ rating is the lowest in 21 months. The average target price of brokerages has also been trending lower, from over Rs 4,000 at the start of 2022 to Rs 3,574.48 on Monday.