IT scrips tank after TCS posts tepid Q1 numbers

The IT bellwether Tata Consultancy Services(TCS’s) share price dipped by 4.64 per cent to ₹3,113.8 to a three-week low today. This comes after the IT giant’s first-quarter earnings released on Friday fell short of the market’s expectations.

TCS posted a 5.21 per cent year-on-year (YoY) growth in consolidated net profit at ₹9,478 crore in the June quarter. The impact of annual salary hikes, rising travel expenses and increased subcontracting costs, which drove operating profit margins to multi-quarter lows, restrained the growth.

The earnings miss from TCS has lowered expectations across the board in the IT industry. Even though other IT players are yet to declare their earnings update, their scrips are already taking a hit. 

HCL Tech, which will be posting its results tomorrow, has already seen its scrip fall by 4.07 per cent to ₹943.55. Similarly, Infosys scrip fell by 2.73 per cent to ₹1,473.15, Wipro lost 1.89 per cent to ₹411.20, and Mindtree fell by 2.64 per cent to ₹2,813.5, as the markets closed today. 

All the top and mid-tier IT companies are due to post their results in the next two to three weeks. As the market seems to have already discounted the sector’s earnings miss, the Nifty IT Index  fell by 3.08 per cent. In contrast, the benchmark Nifty 50 dipped by 0.03 per cent. 

Post the TCS results, research firm Emkay Global in a report said the Q1FY23 operating performance was a tad below expectations. Revenue grew 1.3 per cent QoQ to $6.78 billion EBITM declined 190 basis points QoQ to 23.1 per cent due to salary hikes, higher backfilling costs due to attrition and an uptick in travel expenses. 

“We cut FY23-25 Earnings Per Share (EPS) estimates by 1-3 per cent due to the Q1 miss. The demand environment remains healthy in the near term; however, macro uncertainties weigh on valuations,” it further said. 

Analysts believe TCS’s performance is a headwind for the stock movement of all other companies in the sector. Omkar Tanksale, Research analyst, Axis Securities, told BusinessLine, “As TCS is leader of the pack, the train follows. As the market sees a potential slowdown in the business for the leader, it is anticipated that other companies too will function under the same trend.” 

The stock value of the companies could fall even further considering the growth could be impeded in the upcoming two quarters. “Although the scrips have already faced heavy corrections in the last months, the probability of them dipping further is remains evident” Tanksale added.