India Markets open in 8 hrs 19 mins

Beyond TCS - strong numbers raise hopes for a sector turnaround

1 / 1

Beyond TCS - strong numbers raise hopes for a sector turnaround

The TCS stock touched a 52-week high on the Bombay Stock Exchange in early trade on July 11 and some analysts believe it's adding to a growing perception that the IT sector is coming out of the woods.

The first quarter results of Tata Consultancy Services (TCS), India's oldest and largest IT company, have raised hopes of a sectoral turnaround. The TCS stock touched a 52-week high on the Bombay Stock Exchange in early trade on July 11 and some analysts believe it's adding to a growing perception that the IT sector is coming out of the woods. However, not all are convinced about an IT bounce back and would prefer to wait and watch. "TCS has been consistently doing well among the IT companies even during tough times and that continues and I would wait for the performance of half a dozen other companies (combination of large and mid size) over the next one or two quarters to say that we are back to a double digit growth period," says Sudin Apte, CEO and Research Director, Offshore Insights. He does add that "the market situation has improved and there are good reasons to believe that a turnaround is likely but is there a turnaround? Not yet, is what I would say."

The reason for some of the Indian IT companies not doing well, according to Apte and some other analysts, is not that the market was bad but had more to do with what some describe as a "misalignment between what Indian IT companies can offer and what the clients want." But there is a trend towards bridging that gap and the environment is also picking up, especially in the US. Sudheer Guntupalli of Ambit Capital says that the TCS results were in line with his expectations and "this performance was driven by strong recovery in BFSI, retail and communications, verticals where we were expecting uptick in IT spend driven by the US tax reforms. Overall, the US reported its strongest growth in the last three years. The important point, he says, is the "rebound in US macro / rising interest rate environment." A similar trend of growth acceleration in key verticals of Accenture (BFSI, Communications) in the third quarter of 2017/18 "reinforces our thesis that US tax reforms should lead to an uptick in IT spending in BFSI, retail, technology & communications." That could be good news for Indian IT but there are company specific issues - they could be around service line and client-specific issues.

However, Sandip Agarwal of Edelweiss, while pointing to the highlights of the TCS performance in his recent report -- its strong BFSI revival (up 3.7 per cent quarter on quarter); its "best Q1 growth" of 10 per cent year-on- year (yoy) in the last three years; robust growth in the UK and Europe of 19 per cent yoy apart from TCS's bullish commentary and optimism on BFSI -- sees a clear turnaround for the sector. "We continue to maintain that sector turnaround has just begun and revenue acceleration will continue as the proportion of low growth business will keep declining while that of high-growth digital will rise."