TCS Adds To IT Sector Gloom, Shares Slump On Cautious Commentary

Tata Consultancy Services (TCS) shares dropped as much as 6.4 per cent on Thursday, after the Mumbai-based IT major said it is witnessing "sequential loss of momentum" in the key banking, financial services and insurance (BFSI) vertical.

"Based on data at the end of August 2016, the company has characterized customer outlook as one marked by abundant caution, with some holding back of discretionary spending, particularly in the BFSI vertical in the US, resulting in sequential loss of momentum," said TCS in a statement to the Bombay Stock Exchange.

BFSI is TCS' biggest vertical, accounting for over 40 per cent of revenues. More clarity about TCS' outlook will emerge after India's biggest outsourcer updates investors on business trends next week, the company said.

TCS refrained from issuing a profit warning like mid-tier Mindtree did last week, but the selloff indicates that investors are not willing to take chances with IT stocks that have been under severe pressure, following Infosys' downward revision of its sales outlook in July. (Read)

All frontline IT stocks, including Tech Mahindra (-2.7 per cent), HCL Tech (-1.7 per cent), Infosys (-1.6 per cent) and Wipro (-1.6 per cent) closed lower, tracking the selloff in TCS.

TCS had outperformed in the June quarter, with constant currency revenue growth rising 3.1 per cent sequentially and EBIT or operating margin of 25.1 per cent in Q1. The latest commentary however indicates that TCS may not do as well in the second quarter, traders said.

"We believe that Q2 growth could be in the 1-2 per cent range (down from 3.1 per cent in Q1), and a seasonally weak H2 (second half) could translate into earnings downgrades of 3-4 per cent," said Religare Securities.

According to Edelweiss Securities, Q2 is a high growth quarter for TCS and Infosys as both companies clock majority of incremental revenue in this quarter.

"With lack of momentum in the BFSI vertical (contributes nearly 40 per cent to revenue) the chances of a strong second quarter FY17 are dim and will probably drag down TCS' FY17 growth as well," it added.

Gaurang Shah of Geojit BNP Paribas said TCS' commentary is not surprising, considering the negative outlook about the IT sector.

India's $150 billion IT sector has come under pressure because of weak growth in the US and Europe, which together account for 70-80 per cent revenues of big IT companies. Adverse consequences of Brexit have further added to gloom around the IT sector. (Read)


TCS shares, which closed 4.85 per cent lower at Rs 2,322, underperformed the broader Nifty that ended up 0.4 per cent.