Disappointing TCS, HCL Tech numbers leave IT defenceless

Tata Consultancy Services and HCL Technologies each declined about 9% on Friday, the worst daily fall in at least five years and HCL Technologies each declined about 9% on Friday, the worst daily fall in at least five years, amid investor concern over growth prospects after the financial performance of both software exporters in the September quarter missed analysts’ expectations

The 10-share S&P BSE IT index dropped 4% while the benchmark Sensex gained 0.4%. TCS reported revenue of $3,929 million for the quarter, compared with expectations of about $3,975 million. HCL Tech’s revenue grew 1.9% sequentially to $1,433 million, lower than the analysts’ estimate of over 3.5%. HCL Tech fell 9.09% to Rs 1,505.55 and TCS closed 8.73% lower at Rs 2,444.90, the biggest losers on the IT index. Both companies said they were hurt by unfavourable cross-currency movements.

The dollar appreciated 3.4% against the euro during the quarter from the preceding quarter, affecting the dollar revenue of IT exporters adversely. “The appreciation of the dollar against the euro wiped out over 130 basis points from the revenue growth,” Anil Chanana, chief financial officer of HCL Technologies, told ET. “Barring this, the constant currency revenue growth was a healthy 3.2%.”

For TCS, apart from the currency hit, there was an unexpected slowdown in project rollouts. “Ramp-up of some of the projects did not happen as expected. We still delivered a robust sequential growth of 6.1% in volumes,” said Rajesh Gopinathan, chief financial officer, TCS. Both TCS and HCL Tech reiterated optimism about future growth, backed by continued addition of clients, a stable pricing trend and higher employee intake during the September quarter.

CMC, another Tata group company, fell over 14% to Rs 1,872.65 after its board approved its merger with TCS. As per the scheme of amalgamation, CMC shareholders will receive 79 TCS shares for every 100 CMC shares they own. The ratio as of Thursday’s price was a 3% discount for CMC.

“The discount should have been higher, given CMC’s lower growth and margin as compared to TCS, though this will have marginal impact on earnings,” said Rumit Dugar, an IT analyst at Religare. As per Friday’s closing price, the value of 100 CMC shares was Rs 1.87 lakh while 79 TCS shares were worth Rs 1.93 lakh.

All stocks on the IT index closed lower. Infosys, which fell 0.3%, declined the least. KPIT and Mindtree lost 2.27% each, Tech Mahindra fell 1.28% and Wipro dropped 1.08%. “IT stocks came under selling pressure as the Street reacted to TCS’ outlook, which indicated that it may not be able to beat FY14 growth rate of 16.2%,”said Sanjeev Zarbade, VP at Kotak Securities.