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TCS shares fall 2.5% after operating margin misses estimates

Ravindra N. Sonavane
TCS reported third-quarter earnings before interest and taxes (EBIT) margin of 25.6% of its revenue, about 100 basis points lower than Street estimates

Mumbai: Shares of Tata Consultancy Services Ltd fell over 2.5% to hit over a six-week low on the BSE on Friday, a day after the company reported sharp contraction in its operating margin. The stock fell 2.55% intra-day and touched a low of Rs 1,840.10, a level last seen on 27 November 2018. The stock hit an all-time high of Rs 2,273 on 1 October 2018, and had since declined over 19%. At 10.06 am, the scrip was trading at Rs 1,852 on the BSE, down 2% from its previous close.

TCS reported third-quarter earnings before interest and taxes (EBIT) margin of 25.6% of its revenue, about 100 basis points lower than Street estimates, due to a 60 basis point headwind from cross-currency movements. One basis point is one hundredth of a percentage point.

“Sharp margin contraction disappointed, largely due to higher sub-contracting charges. Fewer mega-deals than in the year-ago period, combined with signs of macro slowdown in the US, could lead to slower growth in 2019-20 according to estimates,” said Kotak Institutional Equities in a 10 January note.

Kotak Institutional Equities reduced its 2019-21 earnings estimate for TCS by 2-3% due to a revised rupee/dollar rate and 70-90 basis point cut in margin assumption. The brokerage firm also cut its target price for the share to Rs 1,825 from Rs 1,950 and maintained its “reduce” rating due to stretched valuations.

During the third quarter, sub-contracting costs increased 60 basis points to 7.6% of revenues due to shortage of talent onsite. The company expects the 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 the company's execution capability and ability in absorbing price hikes,” brokerage firm Sharekhan said in a 10 January note.

TCS' revenue rose 1.8% in constant currency terms during the October-December quarter against the preceding three months, while net profit rose 1.9% to $1.14 billion from $1.11 billion. A Bloomberg survey of 17 analysts had estimated a net profit of Rs 8,154.4 crore ($1.17 billion) on net sales of Rs 37,849.1 crore ($5.43 billion). The company won deals worth $5.9 billion in the December quarter, taking the total number to $15.7 billion in the first nine months of the current financial year.

“TCS results came in a bit below our expectations on growth, but missed EBIT margins materially. In dollar terms, growth was materially lower, driven by higher-than-anticipated constant currency impact,” brokerage firm Nomura said in a 10 January note. The brokerage firm maintained its “reduce” rating on the stock and kept its target price to Rs 1,840 per share.

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