Tata Consultancy Growth Slows as Europe Clients Hold BackAnoop Agrawal and Kartikay Mehrotra
Tata Consultancy Services Ltd., Asia’s largest software exporter by market value, is poised to report its weakest revenue growth since 2010 as six quarters of recession in Europe slows demand for its services.
Sales at the Mumbai-based company will climb 19 percent in the fiscal first quarter ended June to 176.3 billion rupees ($3 billion), the median of 38 analysts’ estimates compiled by Bloomberg. That will be the slowest pace since the three months through June 2010. Tata Consultancy, also known as TCS, will report earnings today. Europe contributed 27 percent of TCS’s sales in the year ended March, data compiled by Bloomberg show.
TCS may join larger competitor Accenture Plc in signaling customers in Europe are putting off technology services spending as the region’s economy struggles to recover from its debt crisis. Information technology companies with sizeable business in Europe may post depressed earnings in the June quarter, according to Anurag Rana, an analyst at Bloomberg Industries.
“The spending that is coming through isn’t giving opportunity to companies to grow” in Europe, said Amit Aggarwal, an analyst at SPA Securities Ltd. in Mumbai. Only companies such as Wipro Ltd. and HCL Technologies Ltd., “which have significant footprint in the infrastructure management service business, will show growth in Europe.”
Sales expansion in continental Europe at TCS slowed to 21 percent in the year ended March, from a 42 percent pace in the previous 12 months, according to data compiled by Bloomberg.
The euro-area economy is forecast to have stagnated in the second quarter after a contraction in the first three months of the year that extended its recession into a sixth quarter. Recent reports showed European car sales slumped to a two-decade low, German investor confidence unexpectedly dropped and euro-area exports fell, adding to signs that the region is struggling to emerge from the recession.
“The situation in Europe is not even slightly better. It’s probably slightly worse,” Accenture Chief Executive Officer Pierre Nanterme said on a conference call June 27 after the company forecast sales that trailed analysts’ estimates. “So the mood with our clients over there is still to be thoughtful and be very mindful about the way they invest.”
Infosys Ltd., India’s second-largest software exporter, last week said increased competition for large outsourcing deals was also adding pressure on services providers to cut prices. “Discretionary spending is under pressure for small projects in Europe,” Chief Executive Officer S.D. Shibulal said on a conference call.
Shares of Infosys surged the most in six months in Mumbai trading July 12 after the company’s sales forecast in dollar terms beat analyst estimates. The Bangalore-based company reiterated full-year dollar revenue will increase 6 percent to 10 percent. Ten analysts in a Bloomberg News survey predicted Infosys would cut the top end of its guidance to 7.5 percent.
Tata Consultancy fell 1.1 percent to 1,660.40 rupees at the close in Mumbai, paring the stock’s climb this year to 32 percent. Infosys has gained 21 percent in the period while the benchmark S&P BSE Sensex has added 3.6 percent.
TCS will report today net income climbed 14 percent last quarter to 37.4 billion rupees, according to the median of 38 analysts’ estimates compiled by Bloomberg.
“As India’s largest and most-experienced IT services firm, TCS is well-positioned to benefit from the growing demand for offshore IT services,” Kolkata-based Ashika Stock Broking Ltd. wrote in a research note last month. “As per its current deal pipeline and interaction with its clients, TCS is witnessing an uptick in discretionary IT projects,” the securities company wrote.
The Indian rupee declined 8.6 percent against the dollar in the April-June period, helping cut the cost of the country’s computer services to overseas buyers. Still, other cross-currency movements damped overall revenue gains, according to analysts.
“This will have an adverse impact on reported U.S. dollar revenue numbers by 56 basis points to 111 basis points for” the country’s largest information technology companies, Pratik Gandhi, an analyst at IDBI Capital Market Services Ltd., wrote in a note to investors on July 4. Investors will be looking for commentary from TCS on “demand environment, pricing, discretionary spend, new deal wins, hiring target and U.S. immigration bill,” Gandhi wrote.