Tata Consultancy Services Ltd (TCS) ended fiscal year 2018 (FY18) on a positive note, recording a sequential constant currency growth of 2% in the March quarter, higher than Street estimates of 1-1.5%.
The $100 million client segment has seen one addition and the other client buckets also saw noticeable additions. Cash conversion is strong. The contribution of digital business in the overall revenues continues to rise and operating margins have improved.
Further, the management is confident of carrying forward this positive momentum into FY19. It expects the margins to remain stable.
The company is seeing renewed traction in the UK and Europe. Industry-wise the management is confident about the retail business vertical gaining momentum in the rest of the fiscal year. Six industry verticals grew faster than the company average on a year-on-year scale.
The only business segment that is lagging is the banking and financial services (BFS) vertical, which generates almost one-third of TCS’s revenues. Commentary on this segment remains cautious.
In a post results conference, the management said it is incrementally turning confident about the BFS vertical, though revenues are yet to reflect this. Growth in this segment remained flat or expanded just 0.4% on a sequential basis in constant currency terms. More clarity is expected in the June quarterly results.
Traction in this segment may well be crucial for the earnings upgrades, a necessity for the next leg of growth in the stock.
After trailing the benchmark indices in 2017, TCS along with the other information technology stocks began gaining traction this year. As Nirmal Bang Institutional Equities points out, the gains are driven more by expansion in valuation multiples and sector rotation than a growth recovery, which was modest until now.
The TCS stock is trading at about 20 times FY20 estimates compared to Infosys Ltd’s and Wipro Ltd’s 13-17 times. The valuation premium is partly justifiable due to TCS’s relatively better performance in the past.
But for the stock to deliver good returns, the BFS vertical has to revive. Indeed, the overall growth rate has improved in the fourth quarter incrementally and management commentary is encouraging. But as the chart shows, TCS has a noticeable distance to cover on the growth metrics and this will prove crucial for the stock.