Tata Consultancy Drops Most Since 2009 After Profit Miss

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Tata Consultancy Services Ltd. slumped the most in more than five years in Mumbai trading after the Indian software company posted its first earnings miss in six quarters and forecast the current period will be “soft.”

Shares plunged 8.9 percent, the biggest drop since May 2009, to close at 2,441.15 rupees. The stock was the worst performer on the S&P BSE Sensex Index, which rose 0.4 percent, and the second-biggest loser on the MSCI Asia Pacific Index.

India’s largest software services provider joins larger competitor Accenture Plc in reporting profit that missed analyst estimates as clients of the Mumbai-based company outsource work as smaller projects rather than large deals. Tata Consultancy won four contracts worth more than $50 million each last quarter, down from five in the preceding period, and added no new business exceeding $100 million.

“Large deals won’t be back at all,” Ian Marriott, a vice president at Gartner Inc., said by phone. “You’ll start to see more and more modestly sized relatively short deals because people have got to get deals through more quickly to change the business, be more competitive, and grow into new markets.”

Net income rose 14 percent to 52.9 billion rupees ($860 million) in the three months ended September, Tata Consultancy reported yesterday. Profit trailed the 53.8 billion-rupee median of 44 analysts’ estimates compiled by Bloomberg.

Holiday Impact

Tata Consultancy predicts a “soft quarter” in the three months through December as the holiday season slows outsourcing work at industries ranging from retail to manufacturing, Chief Executive Officer N. Chandrasekaran told reporters yesterday.

“The number of holidays that are coming with Thanksgiving in the U.S., the Christmas season, those things will affect the volume,” he said. “The overall business environment is good, so we should look beyond Q3, beyond this fiscal year.”

A venture with Mitsubishi Corp. for tapping information technology contracts in Japan may add business at a slower pace than initially projected, according to analysts including at BNP Paribas SA.

“With the Mitsubishi deal, we have a base scale now. We were operating on a sub-$100 million level, suddenly we have a $600 million revenue base,” Chandrasekaran said in an interview today. “Every market has its nuances. Japan is a very relationship-oriented market, very process-driven.”

‘Slow Burners’

Sales rose to 238.2 billion rupees trailing the 240.1 billion-rupee median of analysts’ estimates. The operating margin narrowed to 26.8 percent from 30.2 percent a year earlier as cost of revenue jumped 21 percent and the impact from the Japan venture crimped margins.

“Japan has always been a really tough market to break into,” said Gartner’s Marriott. “Anything that can position you as a local player is a good thing to be doing. These kinds of investments are probably slow burners. In certain markets, you’re not going to make an immediate impact.”

Worldwide information technology spending is expected to increase 2.1 percent this year, down from an earlier projection for 3.2 percent growth, researcher Gartner said in June.

Tata Consultancy is eyeing possible acquisitions in Europe to expand its presence in a market, which combined with the U.K. contributes the largest share of revenue after North America. The software provider, which acquired French IT services company Alti SA for 75 million euros ($96 million) last year, may also look at adding businesses in the U.S.

German Target?

“We would now like to deepen our presence in Europe, especially Germany,” Chandrasekaran said today. “In U.S., we will look at it from a sectoral point of view, health care is something we will be looking at.”

Infosys Ltd., India’s second-largest software services exporter, on Oct. 10 kept its forecast for full-year sales growth of 7 percent to 9 percent in U.S. dollar terms. The Bengaluru-based company’s shares declined 0.4 percent, while smaller rival HCL Technologies Ltd. slumped 9.1 percent after posting sales that missed analysts’ estimates.

Customers are focusing their discretionary spending at digital-related projects, Tata Consultancy’s Chandrasekaran said yesterday. The company targets to win at least $5 billion worth of such contracts in the next four to five years, he said.

“The deal pipeline is strong,” the chief executive said. “Momentum is building up in digital. The U.S. is strong, Europe is also quite strong.”

(Updates with closing shares from first paragraph.)
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