IT stocks head South on TCS caution

Investors appear to be turning jittery towards the IT sector, with the TCS honchos turning cautious about the company’s prospects in Q4 of the current fiscal and the CNX IT index losing over 200 points around noon today.

Investor nervousness has become more pronounced after the TCS statement, which came on the back of the caution issued by the Infosys CEO SD Shibulal last week that the company expects growth in the 2014 fiscal to be at the lower end of the 9-10 per cent band that it had indicated earlier.

It was reported that TCS’ CFO Rajesh Gopinathan had a meeting with analysts in which it was indicated that EBIT margins could fall by 40-50 bps quarter-on-quarter and apart from softness in overseas revenues, the Lok Sabha polls would impact domestic revenue. But margins over the long-term would remain stable.

The comments from the two IT czars has sent the IT sector into a tizzy with the CNX IT index shedding more than 230 points shortly before noon today.

Just as Shibulal’s comments sent the Infosys stock crashing, the TCS stock was the biggest loser in the IT pack today, shedding 4.54 per cent or ₹96.40 to ₹2,025.60. Infosys lost ₹83.30 to trade at ₹3,267.25 and MindTree was down by ₹61.95 at ₹1,393.60. Among the smaller IT companies, the notable losers were Persistent Systems, down by ₹40.20 to ₹ 1,019.20 and eClerx Services that shed ₹30.05 to ₹1,106.

However Wipro and HCL Tech were able to limit the damage. Wipro was down by ₹1.05 to ₹541.50 and HCL Tech was trading at ₹1,400, a loss of ₹13.05. Tech Mahindra was trading at ₹1,778.50, a loss of ₹15.85.

On the 20-stock CNX IT index, only five — Polaris, Rolta, Financial Tech, Hexaware and Wipro — were in the green.

Commenting on the meeting Rajesh Gopinathan had with analysts, Angel Broking, Mumbai, said the TCS management expected overall demand to remain in line with its expectations “with 1HFY2015 expected to grow faster than 2HFY2015”. This was because of a likely return of ‘discretionary spending, increased penetration in Europe’ and as it did not witness `any ramp-downs or cancellations in projects in recent weeks.’  

However, TCS expects EBIT margins to fall by 40-50 bps quarter-on-quarter on account of ongoing investments to enter newer geographies and service lines and that margins could stabilise in the 27-28 per cent band in the long-term,an Angel Broking report said. Moreover, Q4 was traditionally a soft quarter in terms of volume growth for the IT sector and this was expected to continue this year as well.

Angel Broking said it expected TCS “to outperform the industry” on the revenue growth front. Expressing the view that the company’s “premium multiples are well-deserved given its consistency in performance and leadership in growth/profitability”, Angel Broking maintained its buy rating on the stock with a target price of  ₹2,470 over the next 12 months.

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