Since 25 June, when Accenture Plc. reported better-than-expected quarterly results, its stock has risen by 8.5%. But overeager investors in Indian stocks pushed shares of Tata Consultancy Services Ltd (TCS) even higher. They have risen 9.3% since Accenture’s results were announced, adding about $9.5 billion to the firm’s market cap in the process.
Accenture’s results for the March-May period were defined by stability. Its revenues grew 1.3% year-on-year in local currency terms and its operating profit margin rose by 220 basis points sequentially. But TCS’s performance in the April-June period was anything but a picture of stability. Its revenues fell as much as 6.3% year-on-year in constant currency, and its margins fell by 150 basis points compared to the March quarter.
“Accenture’s results were exceptional; but investors assumed they would become the rule rather than the exception for IT results. TCS’s results reflect the reality of the pandemic,” said an analyst at a domestic institutional brokerage requesting anonymity. But as pointed earlier, TCS shares are far removed from reality. They are back at their February highs, before stocks started correcting to factor in the impact of the pandemic.
Shares of India’s largest IT services company have behaved strangely for a while now. Even after weaker-than-expected March quarter results, they unexpectedly rallied, with some investors getting enthused by the company’s positive commentary. The management’s comments after its June quarter results were even more upbeat. “The response of governments and other institutions has been very large and very early, and we expect the recovery trajectory to be better compared to post financial crisis period,” Rajesh Gopinathan, chief executive officer of TCS, said in a press conference.
TCS doesn’t provide a formal guidance, but reiterated its statement that it expects revenues in Q4 to be flat on a year-on-year basis in constant currency terms. Needless to say, the sharp decline in Q1 revenues and the fact that the recovery will be gradual means that revenues will decline in FY21.
What’s more, the impact on profitability was far worse than what analysts had anticipated. While a sharp decline in revenues naturally results in lower margins, the company also benefitted from lower travel costs and the depreciation in the currency. “Operating margin, at 23.6%, were the lowest since June 2017, notwithstanding benefits of rupee depreciation, tight cost controls, alongside savings on travel etc. The operational miss flowed through in terms of sharp miss in net profits,” analysts at Emkay Global Financial Services Ltd said in a note to clients.
Of course, much of this is to be expected given the severe impact the pandemic has had on several clients of IT companies. And indeed, Indian IT firms such as TCS have done well to offset some of the impact. For some reason though, investors assumed that there will be nearly no impact. Hopefully, when trading resumes on Friday, this misconception will cease to prevail.
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