Tata Consultancy Services (TCS) organized an analyst briefing with Rajesh Gopinathan, Chief Financial Officer (CFO). The management indicated weak sentiments vs. at the start of the year, mainly due to softness in Insurance (which has not picked after a soft 1H) and Energy and Utilities (lowering oil prices).
E&U should grow well in the near term on the back of momentum of the previous quarter. But it remains to be seen how the budgets pan out for CY15 amid the current environment.
For Q3FY15, TCS indicted that growth will be lower q-o-q due to less number of working days and seasonal furloughs, however broadly in-line with management expectations. Verticals such as Retail, Manufacturing, Hi-tech and BFSI (70% of revenues) will be impacted. Secondly, the continued softness in Insurance will compound. Telecom and smaller verticals are expected to grow faster than company average. In terms of geography, TCS indicated that North America would grow adjusted to seasonality, Europe (excluding UK) to grow stronger than other geographies, and UK likely to be impacted due to Insurance and seasonality. APAC and India may grow in line with company average. However, India has not yet turned a corner completely, and remains relatively fragile. Among services, IMS will continue to lead growth, while the growth among the remaining segments will be fairly broad-based too.
Along with this weakness in GBP and Euro, cross currency is expected to impact USD CC revenues by 220bps q-o-q. Our USD revenue growth estimate for the quarter stands at 3% in CC post the management interaction.
During Q3FY15, Adverse movements in cross currencies have been accompanied by depreciation of the INR. As a result of this, the impact on the operating margins is expected to be marginally positive (20-30bps q-o-q).
MSFL Research said, "We model 27% EBIT margin in 3QFY15, compared to 26.8% in the previous quarter. TCS continues to maintain its target band for margins as 26-28% going forward and its investments will be focused on strengthening its presence in Japan and France, in addition to developing its digital practice. Forex income is likely to witness uptick q-o-q whereas other income would be slightly softer than previous quarter due to cash reduction."
"We have cut our USD revenue estimates for FY15/16 by 1.1%/2.3% due to management’s incrementally cautious stance on outlook of Insurance segment and Energy industry and higher than anticipated impact from cross currency movement. We now expect USD revenue growth of 16.4%/14.7% in FY15/FY16. Our EPS estimates for FY15/16 are down by 1%/1.5%. We maintain our Accumulate rating on the stock with target price of ' 2,600 and would see any correction as an entry opportunity," it added.
