Why TCS Shares Have Hit Five-Month Low

December has been a bad month for markets in general and IT stocks in particular. The Sensex has shed nearly 1,600 points or 5.5 per cent (including Monday's intraday low) in just 11 trading sessions this month, while the IT sub-index on the BSE has dropped over 10 per cent during the same period. Among frontline IT stocks, Tata Consultancy Services shares have fallen nearly 11 per cent (including Monday's low) this month. Infosys has fallen more than TCS in December because its promoters sold shares last week.

TCS was the top Nifty loser today, falling to its lowest intraday level since July 17. The selloff in TCS has come despite the rupee weakening past 62.50 against the dollar and data points from the US suggesting a pickup in the economy. The US is the biggest market for Indian outsourcers.

Here are the reasons for the selloff in TCS:

1) The management of TCS sounded "cautious" about growth in the December quarter in an analyst meet held on Friday. According to Nirmal Bang's Girish Pai, who attended the meet, TCS is likely to post a sequential growth of 1.5 to 2.5 per cent in the December quarter as against 3 per cent growth in the corresponding quarter last year in constant currency terms.

2) For the full year, the IT industry is likely to deliver low-teen growth versus midteen growth (organic) in FY15, the domestic brokerage added. That means TCS may not exceed the 16 per cent dollar revenue growth it delivered in 2013-14 fiscal. "Currently, the Sell side is assuming a 15-18 per cent growth in FY16 for TCS, which we believe looks a bit aggressive based on the relatively cautious outlook on the business currently," Mr Pai said.

3) The cautious commentary from TCS is in contrast to the upbeat body language of Infosys' management at its analyst meet held a week ago. According to Mr Pai, the growth differential between the two companies is likely to narrow substantially in FY16 versus FY15. This may result in correction in TCS at the cost of Infosys because of the valuation gap. TCS trades at 22.9 times its price earnings (trailing 12 months) as compared to Infosys 18.4, according to Bloomberg. (Read full story here)

4) TCS is likely to be the hardest hit because of cross currency impact, analysts say. The US dollar has gained against the pound, euro and Australian dollar, currencies which contribute between 25-30 per cent to revenues of frontline IT firms. Jefferies lowered its FY16/FY17 earnings per share estimates for TCS by 2.1 per cent on cross currency impact. (Read)

5) The barrage of bad news assumes significance because it comes in the December quarter, which is seasonally weak due to holidays in the United States and Europe, key markets for India's $100 billion-plus outsourcing sector.

As of 10.54 a.m., TCS traded 3.3 per cent lower at Rs 2,370, underperforming the 2 per cent fall in the IT sub-index on the BSE.