 "Cloud over TCS revenue as IT sector faces heavy weather")
TCS, India’s largest software exporter, will also for the first time miss its margins projections of 26-28 per cent this year, as visa fees and wage hikes add up to the company’s woes in a slowing market, say analysts.
Nasscom has projected Indian software exports to grow 10-12 per cent this year, but a combination of slower market growth and dull outlook by India’s top three companies — TCS, Cognizant and Infosys indicate that the numbers could be revised downwards
Last week, TCS indicated that the growth in second quarter of the fiscal will not be as strong in the seasonally strong quarter, owing to slowdown in discretionary spending by US clients, primarily those in Banking, Financial services and Insurance space. Infosys has revised its annual forecast after it saw project ramp downs and budget cuts. Cognizant too followed suit, citing challenges in financial services and health care projects.
Analysts have cut down the revenue growth forecast by 0.6 to 0.9 percentage points for the current fiscal. Nirmal Bang estimates the company’s expected dollar revenue growth for FY17 at 7.6 per cent, assuming the rest two quarter of the current fiscal will be similar to that of FY16. Similarly, Jefferies has cut its revenue forecast by 0.9 per cent.
“This risk was already present due to the low exit rate of margin in FY16 with slowing growing now making it difficult to recoup the impact of wage hikes, visa costs in the 1Q,” said Vaibhav Dhasmana and Atul Goyal, equity analysts at Jefferies, who have cut down the company’s expected EBIT margin to 25.9 per cent. Meanwhile Nirmal Bang estimates TCS’ EBIT margin for FY17 to be 25.7 per cent.
The US slowdown, when coupled with Brexit, has turned out to be a double whammy for TCS.
Brexit has impinged on sector sentiment although current slowdown is related to US based clients especially in the BFSI vertical, said the note by Jefferies. This will result in lower constant currency revenue growth in the September quarter over June quarter, when the constant currency revenue grew by 3.1 per cent sequentially.
While the company has claimed that the weakness in US BFSI space could be due to upcoming US presidential election, where in outsourcing has become a hot topic, resulting in customers avoiding risk of a bad press in the run-up to the election, analysts remain sceptical.
“While there is no blanket ban on spending, the company has seen varying degrees of caution across project sponsors,” said the note by Jefferies. “Softness in US clients cited by TCS could be a concern in the absence of a plausible reason for the change in spending behaviour.”
Girish Pai, analyst from Nirmal Bang, noted that large banking clients seem to be the problem and not the smaller ones or regional ones for TCS. “There are some programmes that have been deferred, mostly discretionary spending-related including digital,” he said. “Ramp-up in some deals that were won is not happening at the pace that was anticipated previously.”
However, analysts feel, problem could be much deeper than slowing down of discretionary spend by BSFI clients in the US.
Pai said that TCS is facing problems in the US BFSI space, unlike its competitors which are having problems in UK and Europe. “For TCS it is just the reverse. Europe and the UK have been decent, but things have worsened in the US,” he said.
The other issues which are looming over TCS that may have an adverse impact on the company’s growth include Epic Systems IP infringement case claiming a penalty $940 mn and a 2013 case filed by Orange County against the company regarding the joint development of Property Tax Management System, which likely to be closed in the second quarter FY17. These are in addition to the rupee appreciating against dollar in the quarter.