Tata Consultancy Declines on Concern Demand Growth May Slow
January 18, 2012, 8:34 PM ESTBy Adi Narayan
(Updates with closing share price in second paragraph.)
Jan. 18 (Bloomberg) -- Tata Consultancy Services Ltd., Asia’s largest software-services provider, declined to its lowest level in almost two months on concern the company’s banking customers may be vulnerable to an economic slowdown.
Tata Consultancy fell 2.5 percent to 1,076.15 rupees at close in Mumbai, the lowest level since Nov. 25. The benchmark Sensitive Index dropped 0.1 percent.
“Discretionary spending” by customers in the U.S. may be delayed as there will be greater due diligence, Chief Executive Officer N. Chandrasekaran said after announcing that net income rose 23 percent. The World Bank today cut its global growth forecast by the most in three years, saying that a recession in the euro region threatens to exacerbate a slowdown.
“We remain cautious on the stock given the high street expectations built into valuations,” Ashwin Mehta and Pinku Pappan, analysts at Nomura Holdings Inc., wrote in a note to clients after the earnings announcement. The company faces greater risk because of its dependence on banking and financial services clients compared with its peers, they wrote.
Nomura cut its price target for the stock to 1,200 rupees from 1,230 rupees and reiterated their “neutral” rating.
Profit Exceeds Estimates
Tata Consultancy’s profit rose to 28.9 billion rupees ($570 million) in the quarter ended Dec. 31 exceeding the 28.3 billion-rupee median of 35 analysts’ estimates compiled by Bloomberg. Revenue rose 37 percent to 132 billion rupees, matching the median of 45 analysts’ estimates.
The world economy will grow 2.5 percent this year, down from a June estimate of 3.6 percent, the Washington-based World Bank said. The euro area may contract 0.3 percent, compared with a previous estimate of a 1.8 percent gain. The U.S. growth outlook was cut to 2.2 percent from 2.9 percent.
Worldwide spending on information technology services will grow at a slower 3.1 percent pace after climbing 6.9 percent in 2011 to an estimated $874 billion, researcher Gartner Inc. said on Jan. 5.
Infosys Ltd., the nation’s second-biggest software exporter, on Jan. 12 cut its full-year sales forecast in dollar terms for a second time because of weaker economic growth in markets including Europe. Its shares declined 1.9 percent.
Tata Consultancy got 43.2 percent of its revenue from its banking, financial services and insurance practice in the quarter, compared with 35.2 percent at smaller rival Infosys Ltd., the nation’s second-largest software exporter.
‘Strong Pipeline’
“We have pretty strong request-for-proposal pipeline,” Chief Financial Officer S. Mahalingam said in an interview in Mumbai today. The company doesn’t see pricing pressure, he said.
Some banks are reducing the number of jobs citing volatile markets and the sovereign debt crisis in Europe. Societe Generale SA, France’s second-largest lender, said Jan. 4 it plans to cut about 1,580 jobs at its corporate and investment bank, about 10 percent of the unit’s total.
Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, said Jan. 12 it is to cut about 4,800 jobs including 3,500 at the investment bank as it jettisons unprofitable units.
“TCS’ higher exposure to banking, financial services and insurance, relative to peers should hurt it more if decision- making on discretionary spend in BFSI, continues to be weak,” Shradha Agrawal and Deepan Kapadia, analysts at B&K Securities India Pvt. in Mumbai, wrote in a note dated Jan. 17 to clients. They maintained their “underperformer” rating on the stock.
Adding Customers
Tata Consultancy, which provides computer services and back office support to clients including Citigroup Inc. and Singapore Airlines Ltd., added 40 customers during the quarter, ending with a total of 1,003. The company won its second-biggest order from pension provider Friends Life in November.
The company, which derived 53.3 percent of its revenue from companies in North America, 15 percent from the U.K., and 10.5 percent from continental Europe in the quarter, had a 3.2 percent increase in volume in the three months ended Dec. 31 from the previous period.
Information-technology services companies define volume as the number of man-months workers spend on projects for clients.
Volume at Infosys grew 3.1 percent over the quarter, Chief Executive Officer S.D. Shibulal said Jan. 12.
Infosys shares fell the most in nine months on Jan. 12 after the Bangalore-based software-services provider said last week sales in the year ending March 31 will range from $7.029 billion to $7.033 billion, paring an earlier projection.
Workers left Tata Consultancy at a rate of 12.8 percent in the quarter ended Dec. 31, down from 14.4 percent for the same period last year. Infosys reported employee attrition of 15.4 percent for the period.
--With assistance from Arijit Ghosh, Anoop Agrawal and Harsha Subramaniam in Mumbai. Editors: Subramaniam Sharma, Arijit Ghosh
To contact the reporter on this story: Adi Narayan in Mumbai at anarayan8@bloomberg.net
To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net
