Drop in TCS growth momentum is worrying

TCS’s revenue growth has fallen considerably short of the Street’s already toned down expectations

Tata Consultancy Services Ltd’s (TCS’s) revenue growth has fallen considerably short of the Street’s already toned down expectations. The reported revenue of $3.9 billion is as much as 100 basis points (bps) lower than consensus estimates. The last time TCS’s reported revenue fell short by a 100 bps margin, its stock had fallen by as much as 9%. One basis point is 0.01%.
TCS shares can be expected to drop sharply again when trading resumes on Friday. The fall, however, may not be as much as the one in October, since the stock has underperformed peers since then. In contrast, leading up to the September quarter results, expectations had been running high, and valuations, at over 25 times past earnings, left no room for error.
Valuations have since corrected to 23 times past earnings. Still, investors will be worried about the loss in growth momentum at TCS. Revenue grew by only 1.6% in constant currency terms last quarter. The company attributed this to weakness in the telecom and energy sectors, where revenue fell by 6.2% and 4.7%, respectively in constant currency, and the continued decline in the insurance business connected to its earlier acquisition, Diligenta. Excluding these, revenue grew by 2.7%, the company’s chief executive officer N. Chandrasekaran said.
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