Q4 earnings: TCS delivers, but is it enough?

Most positives seem to be factored into current valuations.

Like its peer Infosys, Tata Consultancy Services (TCS), too, surprised the Street by posting slightly higher than expected constant currency revenue growth in the March 2016 quarter.

This is significant given that TCS has been missing Street estimates on this front in the past six quarters.

The company's constant currency revenues grew 2.1 per cent sequentially and was marginally ahead of Street estimates of two per cent as well as Infosys' constant currency revenue growth of 1.9 per cent.

While volume growth, too, was ahead of Infosys in the quarter, full-year numbers still appear weak.

TCS' FY16 constant currency revenue growth of 11.9 per cent was much lower than the 17 per cent levels it witnessed in FY15.

Its revenue growth lagged both Nasscom estimate (12.3 per cent industry revenue growth) as well as that of Infosys (13.3 per cent).

This indicates that the former could be losing some market share.

Analysts at JP Morgan write in a recent note it might be incrementally difficult for TCS to win market share in the coming years on the back of intensifying competition.

Weakness in Diligenta (its insurance business), Japan and telecom businesses pulled down TCS' revenues in FY16.

The management, though, believes at least two of these headwinds - Diligenta and Telecom - have bottomed out and will remain flattish with an upward bias in the coming quarters. Japan will take some more time to recover.

Positively, the management commentary remained confident on most fronts and they believe FY17 will be a year of strong growth.

Cross-currency challenges, higher costs and falling realisations impacted TCS' earnings before interest and taxes margin in the quarter, which contracted sequentially despite the absence of one-offs (Chennai floods related expenses in the base quarter).

Amidst expectations of flattish realisations and utilisations around peak levels, margins are likely to remain range-bound in the near future.

However, higher growth in digital will aid both revenues as well as margins in the medium- to long-term.

Although the management has not called out for any headwinds for FY17, the stock valuations are vulnerable to the slightest disappointments, according to analysts. 

At Monday's closing price, the TCS scrip traded at par with that of Infosys at 18.7 times FY17 estimated earnings.

The latter's strong financial performance has led to a sustained re-rating of its stock, wiping away its valuation discount to TCS.

Thus, most analysts believe the TCS stock is unlikely to provide meaningful upsides from the current levels.