Why TCS Share Price Is Falling

Editor's note: In May 2022, we wrote about why shares of TCS, India's largest IT exporter, were falling.

Adding insult to the injury, Tata Consultancy Services (TCS) share price fell 5% today after reporting its Q1 results last week on Friday.

To be honest, this was already on the cards.

TCS, being an FII favourite stock, was already under selling pressure this year amid the persistent selling by FIIs.

Now, the Q1 results of TCS have left investors worried over margin compression. There's also moderation of growth in Europe due to the client concerns.

Read on to know more about why TCS share price is falling...

Why TCS Share Price is Falling...

One sector that did very well in 2020 and 2021 was IT. IT stocks generated huge returns for investors in this period.

Tata Consultancy Services (TCS) was up 73% in the past two years.

However, this did not last long. TCS's share price started falling in mid-January. Since then, TCS's share price has been on a downward trend.

On a year-to-date (YTD) basis TCS's share price has fallen by 15%.

In fact, all IT stocks have been falling this year.

But why? What suddenly changed that the rapidly growing sector is now falling?

Read on to find out...

The Nasdaq effect...

Since the start of this year, the global IT sector has taken a hit. The tech-heavy Nasdaq has seen a sharp fall.

The Nasdaq Composite is the American stock index that has big tech stocks like Alphabet, Amazon, SNAP, and the like.

Indian IT stocks mirror the Nasdaq index. Often, you'll see that whenever there's a fall in Nasdaq overnight, Indian IT stocks will also fall.

Take yesterday's case for instance. The Nasdaq ended more than 2% lower on Tuesday. The BSE IT index was down more than 2% on Wednesday.

Hence, you see the comparison. Indian IT stocks have been seeing red as global tech majors have seen a major correction.

For understanding this more, tune in to the below video where India's #1 trader Vijay Bhambwani explains how the Nasdaq is dragging Indian IT stocks.

The attrition problem

The attrition rate in the IT sector is very high. Attrition rate means the rate at which employees leave a company.

In its Q4 results, TCS reported an attrition rate of 17.4%.

IT sector has huge growth prospects. Hence, IT companies need to hire skilled people on a big scale to meet demand.

This has led to more job opportunities in the IT sector. Simultaneously, it has created a shortage of digital talent in the market.

Resultantly, employees have multiple job opportunities. Hence, they are leaving their jobs for companies that offer more money.

Hence, companies will have to hire more people at increased costs.

Post pandemic, employees have been demanding jobs with a flexible workspaces. Thus, employees are leaving jobs with rigid workspaces.

All of these reasons combined have put pressure on the margins of IT companies. And TCS has fallen prey to this selloff.

According to brokerage houses, the companies will report lower profit margins in the future. They have raised their concerns regarding falling margins.

Thus, even though the IT sector has fascinating growth aspects, its financial performance has not met expectations.

TCS is no exception to this.

FII Selling

Interest rates are rising in developed markets like the USA. This makes the emerging markets less attractive for FIIs because the risk-free rate of return reduces.

Hence FIIs sell their holdings in companies operating in emerging markets like India to return to the safety of dollars. The same has happened with TCS.

FIIs have been divesting their stake in TCS since September 2020. FII's stake stood at 15.9% in the quarter ending December 2020.

The stake reduced to 14.15% by the end of March 2022. This stake sale by FIIs added insult to injury.

Check out TCS's latest shareholding pattern.

Latest quarterly results

Update: Last week on Friday post market hours, TCS reported its Q1 results.

The company's operating margin fell during the quarter due to an impact of annual salary increase. The management said it was a challenging quarter from a cost management perspective as it impacted their operating margin.

The company's order book also grew by just a little over 1% on a YoY basis to US$ 8.2 bn, which raised some concerns.

To this, the management said they are cautious of global uncertainties. Rajesh Gopinathan, MD and CEO at TCS said,

• Pipeline velocity and deal closures continue to be strong, but we remain vigilant given the macro-level uncertainties.

In an indication, the company said that clients in Europe are more cautious on tech spends given the possibility of deeper recession and ongoing conflict in Eastern Europe, leading to delays in decision making.

Europe business is a key driver for TCS as nearly 30% of the total revenues for TCS come from Europe.

All these reasons were compelling enough to send shares of TCS down 5% today.

Not just TCS, but the entire pack of IT stocks is down today owing to TCS' mixed bag of results.

How IT Stocks are Performing Today

Company	Change today (%)
Tata Consultancy Services Ltd.	-5.0%
Larsen & Toubro Infotech Ltd.	-3.2%
Mindtree Ltd.	-3.1%
Coforge Ltd.	-3.0%
L&T Technology Services Ltd.	-1.1%
Wipro Ltd.	-2.1%
Mphasis Ltd.	-2.0%
HCL Technologies Ltd.	-3.3%
Infosys Ltd.	-2.8%

Source: Equitymaster

All eyes will be on Wipro and Infosys this month as they declare their earnings. Wipro has a board meeting scheduled for announcing results on 20 July while Infosys is slated for 24 July.

How IT stocks have performed this year

Have a look at the table below which shows the performance of IT companies on a YTD basis.

IT Stocks Fall amid Outlook Concerns

Company Name	Closing on 24 May 2022	Fall in share price on a YTD basis
Larsen & Toubro Infotech Ltd.	4,013.05	45%
Mindtree Ltd.	2,898.45	39%
Coforge Ltd.	3,709.80	37%
L&T Technology Services Ltd.	3,530.65	37%
Wipro Ltd.	460.05	36%
Mphasis Ltd.	2,485.65	27%
HCL Technologies Ltd.	991.95	25%
Infosys Ltd.	1,441.20	24%
Tata Consultancy Services Ltd.	3,288.05	12%

Source: Equitymaster

What the future of TCS looks like...

For 2021-22, TCS reported a total income of Rs 1,957,720 m. This is 17% higher compared to the previous year's income.

The total income for the quarter ending March 2022 is Rs 515,720 m. Hence, there has been a rise of 3% in total income compared to the preceding quarter.

However, there has been a corresponding increase in expenses too. Total expenses for 2021-22 was Rs 1,440,850 m. This is 18% higher compared to last year. The quarterly expenses have also gone up by 4%.

Thus, the rise in income is negated by the rise in expenses. As a result, profit for 2021-22 was Rs 384,490 m, which was 18% higher compared to last year. The growth rate was lower than market expectations.

However, TCS has seen an increase in the number of clients. Also, the basic EPS for 2021-22 is Rs 103.62. This is 20% higher compared to last year's EPS.

Even in difficult times, TCS has declared a total dividend of Rs 43/share.

Hence, the profit growth rate of TCS may have slowed down, but it has bright growth prospects and sound fundamentals make up for it.

For a long time, TCS has remained an investor's favourite choice for long-term investment, and it continues to be the same.

Short-term or medium-term investment gains may not be possible due to changes in the market, but it still might be a good choice for long-term investment.

To know more about TCS, check out TCS's financial factsheet and its latest quarterly results.

You can also compare TCS with its peers.

TCS vs Infosys

TCS vs WIPRO

TCS vs Tech Mahindra

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...