TCS facing demand pressure unlikely to sustain momentum

Tata Consultancy Services (TCS) reported better than expected performance in the September 2017 quarter with higher sequential growth in dollar-denominated revenue than the prior four quarters and buoyancy in client addition. This has also helped the company to post a marginally higher growth of 6.8% in the first half of FY18 compared with 6.6% in the six months to September 2016 and 6.2% in the past fiscal.

However, it will be challenging for the company to maintain the momentum since the growth rate has historically been lower for the IT sector in the second half Calcu of the fiscal.

The country’s second-largest software exporter reported 3.2% sequential growth to $4,739 million for the September 2017 quarter. The operating margin improved by 170 basis points to 25.1% after hitting the lowest level of 23.3% in the previous quarter since the March 2008 quarter.

During the quarter, the company added six clients in each of the $10-million-and-above, $20-million-and-above, and $ 50 -million-and-above billing segments of clients. The $100-million-and-above reported one addition.

Employee attrition rate was 30 basis points lower at 11.3%. In addition, after reporting a loss of 1,414 employees in the previous quarter, it added 3,404 heads in the September quarter, taking the total headcount to 3,89,213.

While the growth momentum in the second quarter was strong, the constant currency revenue grew at a slower pace of 1.7% sequentially compared with the reported pace of growth. It reflects a sustained sluggishness in the demand scenario. Indian IT exporters have been striving to adapt to the changing preference of clients for solutions centred around the digital platforms and away from the traditional cost-driven solutions.

The next two quarters are typically sluggish for the sector due to the festive season in the December quarter and budget rejigging by clients in the March quarter.

Therefore, thought the stock may report buoyancy on Friday in response to better than expected quarterly performance, its medium-term movement may show pressure. At Thursday’s closing price of Rs 2,548.6, the stock traded at a trailing price-earnings ratio of 19.

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