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Canary in a coal mine?
TCS’ 2QFY12 missed across revenues, margins and net profits despite
moderated expectations post the European turmoil. While this is TCS' first
miss in almost 18 months and it does deserve some breathing space after
the performance over the last 2 years, simply put these numbers are not
good enough given TCS management's extremely positive commentary
through the quarter and TCS' current bellwether status in the IT industry.
With like to like pricing down for 2nd consecutive quarter, currency
provided most of the margin upside and concerns will persist on
sustainability of margins into FY13. With industry-wide demand
confidence also on hold due to the adverse macro situation, the current
quarter is a setback for TCS’ near-term stock prospects. UPF stays.
Revenue growth was the key dampener in Sep-11
TCS management’s optimistic tone through the quarter had raised hopes of a
solid topline performance in Sep-11 continuing the momentum seen in Jun-
11. However, 4.7%QQ growth in $-revenues fell short of that mark. At
26%YY, this was TCS’ slowest growth in 5 quarters and a marked deceleration
from earlier quarters. While 6.6%QQ decline in the India business impacted
revenue growth, TCS is hoping to reverse the same in Dec-11 with some
assistance from pass-through revenues. Given the current macro
environment and seasonally weaker quarters staring us ahead, onus of proof
remains on TCS to deliver the expected revenue growth in 2HFY12.
Margin performance is largely a cloak of currency
With operational factors largely balancing out, EBIT margins were up
94bpsQQ boosted by the currency move. We expect the margin trend to
continue in 3Q as well with another 150+bpsQQ benefit from a weaker
currency. That said, another quarter of pricing decline (down 95bpsQQ) and a
muted pricing outlook remains concerning. We estimate flattish YY EBIT
margins for TCS in FY12. Forex losses of Rs910m were much lower than TCS’
own estimation. Over Rs5bn of forex losses on the balance sheet will limit the
benefit of a weaker currency from passing through to the net profit line.
Stock performance likely to be elusive
TCS’ financial performance over the past two years is no doubt commendable
and the street has rightly rewarded the stock. With YY revenue trajectory
moderating, macro remaining uncertain and benefits from a weaker currency
already baked into street expectations we see multiple pressure points for
financial and stock performance ahead. Also, in the near-term, TCS’ stock
also needs to contend with the street’s hopes of a turnaround at Infosys
which will potentially move investor money out of TCS into Infosys. At CLSA,
a constructive view on IT stocks remains contingent on FY13 revenue
performance where we see downside risks impairing valuations as well.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canary in a coal mine?
TCS’ 2QFY12 missed across revenues, margins and net profits despite
moderated expectations post the European turmoil. While this is TCS' first
miss in almost 18 months and it does deserve some breathing space after
the performance over the last 2 years, simply put these numbers are not
good enough given TCS management's extremely positive commentary
through the quarter and TCS' current bellwether status in the IT industry.
With like to like pricing down for 2nd consecutive quarter, currency
provided most of the margin upside and concerns will persist on
sustainability of margins into FY13. With industry-wide demand
confidence also on hold due to the adverse macro situation, the current
quarter is a setback for TCS’ near-term stock prospects. UPF stays.
Revenue growth was the key dampener in Sep-11
TCS management’s optimistic tone through the quarter had raised hopes of a
solid topline performance in Sep-11 continuing the momentum seen in Jun-
11. However, 4.7%QQ growth in $-revenues fell short of that mark. At
26%YY, this was TCS’ slowest growth in 5 quarters and a marked deceleration
from earlier quarters. While 6.6%QQ decline in the India business impacted
revenue growth, TCS is hoping to reverse the same in Dec-11 with some
assistance from pass-through revenues. Given the current macro
environment and seasonally weaker quarters staring us ahead, onus of proof
remains on TCS to deliver the expected revenue growth in 2HFY12.
Margin performance is largely a cloak of currency
With operational factors largely balancing out, EBIT margins were up
94bpsQQ boosted by the currency move. We expect the margin trend to
continue in 3Q as well with another 150+bpsQQ benefit from a weaker
currency. That said, another quarter of pricing decline (down 95bpsQQ) and a
muted pricing outlook remains concerning. We estimate flattish YY EBIT
margins for TCS in FY12. Forex losses of Rs910m were much lower than TCS’
own estimation. Over Rs5bn of forex losses on the balance sheet will limit the
benefit of a weaker currency from passing through to the net profit line.
Stock performance likely to be elusive
TCS’ financial performance over the past two years is no doubt commendable
and the street has rightly rewarded the stock. With YY revenue trajectory
moderating, macro remaining uncertain and benefits from a weaker currency
already baked into street expectations we see multiple pressure points for
financial and stock performance ahead. Also, in the near-term, TCS’ stock
also needs to contend with the street’s hopes of a turnaround at Infosys
which will potentially move investor money out of TCS into Infosys. At CLSA,
a constructive view on IT stocks remains contingent on FY13 revenue
performance where we see downside risks impairing valuations as well.
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