TCS hits 3-month low on weak outlook

Written by fe Bureau | Mumbai | Updated: Mar 20 2014, 09:27am hrs
Shares of Tata Consultancy Services (TCS) closed at a 3-month low on the BSE after the company told analysts that it expects earnings in the March quarter to be weak. The scrip closed 3.84% lower at Rs 2040.95 after falling more than 5% intraday on Wednesday.

The IT giant said that its India business would continue to see sequential decline due to muted pre-election spending and expects the usual beginning-of-the-year seasonal weakness to play out in Q4.

TCS' weak earnings outlook dragged down other IT stocks. Among sectoral indices, the BSE IT index (-2.24%) was the biggest loser. Infosys (-2.32%), Tech Mahindra (-1.03%), Mphasis (-2.55%) and HCL Techonologies (-0.75%) ended lower. However, analysts feel TCS scrip is likely to gain going ahead with the management giving positive guidance for FY15. The management has reiterated its optimistic view on the demand environment. Despite seasonal softness in Q4FY14 vis--vis Q3, it expects FY14 to be better than FY13 and FY15 better than FY14, IDFC Institutional Securities said in a note after attending the pre-quarterly analyst meet.

In year-to-date, TCS scrip has shed 6%. Experts feel further recovery in world economy would benefit the stock. TCS stock has modestly underperformed the broader markets recently and currently trades at approximately 18-times FY15E EPS. We see upside to our estimates if the global economy gathers momentum, and expect TCS valuations to inch closer to previous business cycle peak," IDFC Institutional Securities added.

Certain brokerages reduced their target price on the stock. Deutsche Bank cut its target price from Rs 2,900 to Rs 2,800, Barclays cut it from Rs 2,298 to Rs 2,275, while Axis Capital cut it from Rs 2,676 to Rs 2,565.

The weakness in India business could have an impact on the scrip.

India business which accounts 6.3% to overall revenue is down approximately 19% on reported US$ revenue from Q4FY13 owing to rupee depreciation and weakness in business environment due to upcoming elections. The management expects this weakness to continue till Aug-Sept. Typically, Q4 was seasonally strong quarter for India due to budget flush. However, Q4FY14 is likely to see decline on sequential basis but may not be as severe as in Q3 (5.9% decline sequentially), IDBI Capital said in its report.