TCS shares fall 2.5% after operating margin misses estimates


Shares of Tata Consultancy Services Ltd lost over 2.5% to hit over six-week low on Friday after the company reported sharp contraction in operating margin. The stock in intraday fell as much as 2.55% and touched a low of Rs 1840.10 a share – a level last seen on 27 November 2018. The stock has hit an all time high of Rs 2,273 on 1 October 2018 and since then it has declined over 19%. At 10.06 am, the scrip was trading at Rs 1,852 on BSE, down 2% from its previous close.

Third-quarter EBIT margin was at 25.6% of revenue, about 100 basis points lower than consensus estimates on the Street, due to 60 bps headwinds from increased sub-contracting cross-currency movements. A basis point is 0.01%.

“Sharp margin contraction disappointed, largely due to higher sub-contracting charges. Fewer mega-deals than in the year prior, combined with signs of macro slowdown in the US, can lead to slower growth in FY2020E,” said Kotak Institutional Equities in a 10 January note.

Kotak Institutional Equities has cut its fiscal year 2019-21 earnings per estimates by 2-3% due to a revised rupee/dollar rate and 70-90 basis points cut in margin assumption. Its revised EBIT margin stands at 25.6% and 25.7% for FY2020 and FY2021 estimates. The brokerage firm has also cut its target price to Rs 1,825 from Rs 1,950 a share and maintained its “Reduce” rating due to stretched valuations.

During the third quarter, sub-contracting costs increased 60 basis points in the quarter to 7.6% of revenues. The company reported that the increase in sub-contracting was due to talent shortage onsite and for the initial staffing of large engagements. The company expects the sub-contracting trend to continue in the short term.

“We believe it would be transient in nature for TCS as it would rationalise the cost structure in the medium term given its execution capability and ability in taking price hike,” said brokerage firm Sharekhan in a 10 January note.

TCS revenue rose 1.8% in constant currency terms in the October-December quarter from the preceding three months while net profit rose 1.9% to $1.14 billion from $1.11 billion in the preceding three months. A Bloomberg survey of 17 analysts had estimated a profit of Rs 8,154.4 crore ($1.17 billion) on net sales of Rs 37,849.1 crore ($5.43 billion).

TCS won deals worth $5.9 billion in the December quarter, taking the total number of deal wins to $15.7 billion in the first nine months of this fiscal year.

“TCS results came in a bit below our expectations on growth, but missed EBIT margins materially. In USD terms growth was materially lower driven by higher-than-anticipated CC impacts (110bp q-q vs our/cons. estimate of 60-70bp)”, said brokerage firm Nomura in a 10 January note.

“We remain below consensus on our growth and EBIT margin expectations and believe that with YTDFY19 EBIT margins at 25.7% and impending wage hikes in 1QF20F, consensus margin estimates of ~26.3% in FY20F could be at risk, This, in our view, coupled with recent INR appreciation, raises risks of consensus EPS downgrades,” the Nomura report added. The brokerage firm has maintained its “Reduce” rating on stock and kept its target price to Rs 1,840 a share.

Of the analysts covering the stock, 24 have a “buy” rating, 16 have a “hold” rating, while 10 have a “sell” rating, shows Bloomberg data.

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