Sept. 15--Analysts from sell-side firms met executives of Tata Consultancy Services Ltd's (TCS) finance department recently. Incidentally, the company's shares have also given up some of their gains after reaching a high of Rs.2,075 on 4 September. But this has little to do with what was shared at the company's briefing. A sell-side analyst works for a brokerage that manages individual accounts and makes recommendations to clients.
TCS said the demand environment is positive and except for the underlying weakness in the telecom business segment, growth is consistent across service lines and segments. "TCS is seeing a broad-based recovery across verticals," analysts at Citigroup Research said in a note to clients. "Among geographies, demand is led by a broad-based recovery in the US and increasing penetration in Europe."
Why then have the company's shares corrected by over 5% from its high earlier in the month? Of course, the nearly 8% appreciation in the rupee from its low in end-August has reversed sentiment for IT stocks to some extent. In September, the CNX IT index has declined by about 1%, even while the benchmark Nifty index on the National Stock Exchange has rallied by over 8%. Besides, at Rs.2,075 per share, TCS's valuation had risen to as high as 19 times estimated earnings for financial year 2014-15. While this was on account of a lack of decent alternatives, given the tailspin in the domestic economy, the reversal in sentiment this month has negated this advantage.
Thankfully for investors, the recent meeting with analysts suggests that at least fundamentals seem intact. Of course, it remains to be seen if this is sustainable. The company said it hasn't yet seen competitors adjust prices to pass on benefits of the rupee's depreciation to clients. Thanks to the recent rally in the rupee, such decisions are likely to be further postponed.
Near-term results are expected to be spectacular. Analysts came back with the impression that revenues will grow by at least about 5% in constant currency terms in the September quarter, besides which the company will gain on account of cross-currency tailwinds and margin gains from the rupee depreciation. The rupee alone is expected to lift margins by between 275 and 350 basis points in the September quarter. One basis point is one-hundredth of a percentage point.
Losses on the company's hedge positions will offset some of these gains. Religare Institutional Research said in a note to clients that the company's hedge positions are likely to lead to losses of between Rs.500 crore and Rs.700 crore during the quarter. TCS said it will wait for the currency to stabilize before deciding how to reinvest gains.
Despite the recent correction in its shares, TCS still trades at over 18 times estimated earnings in the year to March 2015. While strong near-term results may help sustain premium valuation, further improvements in the domestic economy could, well, cause continued underperformance vis-a-vis the broader market.