TCS Q1 weak as sector demand suffers; reduce target to Rs 2,670: Nomura

TCS’s results exhibit that sector demand momentum continues to suffer from lack of exuberance, with different segment-specific issues causing a miss in growth versus consensus at TCS for the last four quarters. While in isolation there is nothing major to fault in the numbers, soft manufacturing and slightly weaker European growth in Q1 led to the miss.

Given the weak start to the year and muted headcount growth in 1Q, we reduce our dollar revenue growth expectations by 1pp each in FY16/17f to 10%/13.6%. The optimistic management commentary not translating into growth in line with consensus expectations will likely weigh on the near-term stock performance.

However, we retain our ‘buy’, as we believe that TCS remains the better placed than Infosys or Wipro on 1) the breadth and depth of offerings and stronger Digital capabilities, 2) higher skew toward faster-growing segments (IMS, BPO, Engg. Services, testing), and 3) better positioning in BFSI (largest segment within tier 1 IT). We prefer HCL Technologies and Cognizant over TCS.

TATA Consultancy Services ( TCS )

Infosys Technologies Limited