TCS’s commentary on demand dynamics pulls IT sector stocks into the red

• A day after TCS reported its Q2 results, analysts said that the management commentary raised concerns about moderating growth for the IT sector going ahead.
• Concerns related to demand in the key markets of US and Europe have battered the IT stocks with the Nifty IT index losing 28.40% year to date.
• Market believes TCS is better placed to handle the tough environment.

After gaining in the early hours of trade on Tuesday, shares of IT major TCS and other IT companies slipped into the red on fears of a potential recession and a challenging demand environment in the European region.

Shares of TCS were trading down 1.59% at ₹3,069 at 12.34 IST while the Nifty IT index was down -1.26% and the Sensex/Nifty50 were down 0.6%.

A day after TCS reported its results for the July-September quarter, analysts said that the management commentary raised concerns about moderating growth for the IT sector going ahead because of tightening budgets in recession-wary countries.

N Ganapathy Subramaniam, the chief operating officer of TCS said that it’s natural to expect some softness in long-term deals and decisions, given the macro environment. “With regards to Europe, we will see how the winter will be, and expect some softness,” he added in a Q2 results conference yesterday.

A report by Motilal Oswal said that TCS is seeing caution in long-term deals and delayed decision making in Europe, but continues to see a strong spending environment in the US.

While referring to the US markets, Rajesh Gopinathan, CEO and MD of TCS said that their clients are becoming increasingly cautious but that’s yet to impact their deal wins.

“Management commentary on the demand environment and deal pipeline remained intact with no visible impact of weakening macro environment; however, the management has indicated risks to deal pipeline and conversion in Europe due to uncertainty around energy prices,” said a report by Motilal Oswal.

After markets closed on Monday, TCS reported that its revenue grew 4.8% on a sequential basis to ₹55,309 crore for the quarter, while year-on-year it rose 15.4%, in constant currency. The revenue growth has beaten most analyst expectations of a 3% rise sequentially.

Its net profit crossed ₹10,000 crore quarterly for the first time to reach ₹10,431 crore, rising 10% from the April-June quarter.

“The environment is challenging and it requires all of us to remain vigilant. We saw good demand resilience across all our markets," Gopinathan said.

Analysts said worries related to demand in the key markets of US and Europe have battered the IT sector stocks. The Nifty IT index has lost 28.40% so far this year. On Tuesday it was down 1.26%.

TCS is well placed say analysts
However, analysts believe TCS is better placed to handle the tough environment compared to its peers. “We forecast revenue growth of 7.6% and 6.4% for FY23E and FY24E, respectively. TCS has better-than-peers supply-side management, breadth of capabilities and deep domain expertise. While demand may slow down in future, TCS will likely gain share from peers,” said a report by ICICI Securities.

On Monday, the TCS management said that demand for services continued to be ‘very strong’ with growth across verticals.

“Demand for our services continues to be very strong. We registered strong, profitable growth across all our industry verticals and in all our major markets. Our order book is holding up well, with a healthy mix of growth and transformation initiatives, cloud migration and outsourcing engagements,” Gopinathan said.

The strength of the dollar against the rupee has turned out to be beneficial for the IT major, which earns a huge part of its revenue in dollars.

Samir Seksaria, chief financial officer at TCS said that operating margins have been improving because of the flattening of the workforce pyramid, steadily improving productivity and currency support.

Wipro and HCL Technologies are to release their quarterly earnings today.

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