Tata Consultancy Drops Most in a Year as Sales Miss Estimate

  • Citigroup downgrades stock to sell on slowing growth concerns
  • CFO says next few quarters to be weaker than 1Q and 2Q

Shares of Tata Consultancy Services Ltd. tumbled the most in a year after Asia’s largest software exporter reported revenue that fell short of estimates.

The stock fell 4.4 percent to 2,483.70 rupees in Mumbai, the steepest loss since October 2014. The company said Tuesday that revenue in the three months through September jumped 14 percent to 271.7 billion rupees ($4.2 billion), still falling short of the 272.3 billion-rupee estimate in a Bloomberg survey. Net income rose to 60.6 billion rupees, almost matching the estimate of 60.3 billion rupees.

Chief Financial Officer Rajesh Gopinathan told Bloomberg TV India on Wednesday that the growth in the remainder of the current financial year will be weaker than in the first six months, with momentum picking up in the first half of the year starting April 1, 2016. Citigroup Inc. cut its recommendation on the stock to a sell, citing slowing growth and high valuations, while Emkay Global Financial Services Ltd., a Mumbai-based brokerage, cut its rating to a hold.

“Pricing pressure could likely increase as all companies are now aggressively chasing growth,” Citigroup analysts Surendra Goyal and Rishi Iyer said in their report. “We see limited upsides for the sector” as it heads into a weaker budgeting cycle, while “seasonal challenges remain” in the next two quarters, they wrote.

Adding Customers

Tata Consultancy added three customers in the September quarter with a contract value of $100 million or more each, and six more with the potential to bring in $10 million plus each, the company said in a statement Tuesday.

The software maker raised its annual hiring target by 50 percent, saying it saw “broad-based” growth in the U.K., North America and Europe along with emerging markets including Latin America, driven by digital-based services. 

Hiring More

The services provider is looking to hire 75,000 for the year through March 31, up from a previous goal of 50,000, as it battled an attrition rate of 16.2 percent, according to the statement. TCS added a gross 25,186 workers in the quarter, taking the total to 335,620.

Rival Infosys Ltd. on Monday reported a profit growth of 9.7 percent in the quarter, beating expectations, even as it lowered its annual sales growth growth forecast in dollar terms as many currencies weakened against the U.S. dollar. Of the world’s 17 primary currencies tracked by Bloomberg, 14 depreciated against the dollar in the quarter.

Drag on Shares

“TCS’s weak revenue outlook for the next two quarters will continue to drag the stock price,” said Rajendra Wadher, Mumbai-based director at PRB Securities Ltd. “TCS may underperform as profits are lagging Infosys on sequential growth.” The brokerage has a sell recommendation on TCS shares.

Volumes and digital-based services fueled the 14 percent growth in sales, TCS said. Order book wins in the quarter were 30 percent more than the previous best quarter,  Chief Executive Officer N. Chandrasekaran told reporters in Mumbai Tuesday after announcing the earnings. The company announced an interim dividend of 5.5 rupees a share.

“If you don’t look at it from a month-on-month and quarter-on-quarter perspective, it’s a really exciting industry,” Chandrasekaran said. “In my lifetime, I haven’t seen such technological disruption ever. The opportunities are enormous. If you ask me where the growth is, the growth is everywhere.”

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