Looming US penalty, slowing growth cast shadow over TCS

The top management of Tata Consultancy Services (TCS) preferred to stay silent during the press briefing after declaring the quarterly results on Monday evening on the penalty slapped by a US jury. Its stance heightens the uncertainty about growth in the FY17 earnings considering a significant sum of fine.
The company is staring at a fine of over $940 million in a lawsuit filed by Epic Systems. TCS reported net profit of $936 million in the March quarter, which explains the impact if the company were to pay the fine. The company may have to make a provision for it in the June quarter, but the management did not provide clarity on that front.

This may destabilise the earnings expectations by analysts in the short term. This at a time when the company's growth has decelerated compared to its peer Infosys for the first time since FY10. TCS revenue grew 7.1% in FY16 slower than Infosys' 9.1% growth.

During the five quarters to March 2016, incremental revenue of TCS nearly halved to $1,090 million whereas it nearly doubled for Infosys to $790 million on 12-month trailing basis.

TCS added three clients with $100 million deal size each and eight clients having at least $50 million of billing each in the quarter. Investors would keenly observe if this can improve revenue growth as revenue from its UK unit may stay flat.

TCS stock has gained 4% in one year versus 16% jump in Infosys. The divergence is expected to persist.

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