Tata Consultancy Services Ltd (TCS) reported a mere 0.3% sequential growth in revenue in constant currency terms, far lower than the close to 1% growth analysts were expecting. The firm had cautioned analysts about softness in the key banking and financial services (BFS) and retail verticals, and expectations were running low. The fact that growth was lower than even the generally subdued expectations is worrying.

Last week, Infosys Ltd had reported 1% sequential revenue growth. TCS’s constant currency revenue growth of 6.8% is also the slowest in almost two years. What’s more, the company’s employee count fell marginally on a sequential basis, for the first time in 10 quarters.

With momentum slowing, full-year revenue growth is projected at around 8% now. Comparatively, Infosys is estimated to clock revenue growth of around 10% in FY20. Given the high valuation premium TCS enjoys, one should not be surprised if its shares give up some of the recent gains when trading resumes on Monday.

“Valuations at around 23.5 times estimated FY21 earnings are expensive in the context of moderating growth for TCS. TCS is set to underperform Infosys on revenue growth in FY20 and possibly in FY21 as well based on current estimates," said analysts at Emkay Global Financial Services Ltd in a note to clients.

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But as one analyst at a domestic broking firm explained, requesting anonymity, steep valuations aside, TCS provides great comfort for investors in terms of a strong management, execution, cash-flow generation, and a wide scale and bandwidth of services. Any correction in the stock, therefore, would be limited.

“Just because TCS fared badly in one quarter, it doesn’t mean that investors are going to exit in droves. The stock will see a correction. But expect buying support if it falls below ₹2,100," said an analyst at a multinational broking firm, requesting anonymity. The stock closed at ₹2,219.10 on Friday on NSE.

Growth has been particularly weak in the BFS and retail segments, where year-on-year revenue grew by 5.3% and 5.1%, respectively. “In BFS, the US and the UK markets have been a bit structurally challenged. With some of the large accounts there, there is a very strong focus on cost optimization, even though overall budgets have not reduced. We are participating very strongly in those initiatives with automation and other delivery models, which is creating challenges from overall absolute revenue growth perspective," Rajesh Gopinathan, chief executive of TCS, said at a press conference. However, growth has been slowing in this segment for all companies, and TCS said it has gained market share in the BFS segment.

The retail business segment, meanwhile, is expected to remain volatile in the near term, and TCS’s integrated service offerings places it well to capture forthcoming demand. Further, an impressive 22% rise in order booking in the nine months to December 2019, provides decent revenue visibility for FY21.

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