‘Buy’ on TCS with target price of Rs 2,920

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December 16, 2015 12:24 AM

Tcs issued a profit warning for the December quarter, due to operational disruptions from Chennai floods in the first week of the month.

Tcs issued a profit warning for the December quarter, due to operational disruptions from Chennai floods in the first week of the month. This will likely pronounce the seasonal weakness already expected due to year end furloughs and lower number of working days in the quarter. In addition, most other Indian IT services companies also have a presence in Chennai and could also see a volume impact due to operations there, hence impact revenue and margin during the quarter. On Friday evening, TCS issued a profit warning for the Dec-15 quarter due to the flooding from sustained rainfall in Chennai which led to major disruptions in its ability to function. Chennai is one of the largest delivery locations for the company, employing over 65K of the 336K employees for the company globally. While mission critical activities are likely to have seen lesser disruption, work shifted to other delivery locations, and normal business functioning in the city had to be halted due to extreme weather conditions and subsequent flooding. Mission critical activities are likely to have been shifted to other locations under business continuity plans, but the nature of contracts could potentially trigger any penalty clauses that might be built in. Our channel checks with industry participants have indicated a higher proportion of risk in delivering large-scale IT contracts being shifted from clients to vendors. Dec-15 quarter’s weak seasonality is likely to see an incremental negative impact due to the Chennai floods. Longer term sector risks on growth, margins, pricing and cannibalisation from digital services remain.

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