India’s top IT services provider Tata Consultancy Services (TCS) forecast faster sales growth in the next fiscal year but failed to ease investor worries that smaller rivals will also benefit from an anticipated rise in client demand.
Shares in TCS fell as much as 6 per cent on Friday, their biggest single day drop in more than 1-1/2 years, on concerns that the company will have to fight hard for contracts in the United States and Europe, the main markets for India’s $108 billion IT services industry.
“Competition is getting fierce in the market and small players are becoming very aggressive. TCS may see some of its market share going to its rivals in the medium term,” said TainaErajuuri, a Helsinki-based portfolio manager at FIM India, whose holdings include TCS as well as rivals Infosys and HCL Technologies.
Global IT spending growth is expected to accelerate to more than 5 per cent this year after growing last year at its slowest pace since the 2008 global financial crisis, research firm International Data Corporation said.
TCS beat analysts’ expectations and reported on Thursday a 49.6 per cent quarterly profit rise, its fastest pace of increase since mid-2011 at least.
India’s second largest IT outsourcing firm Infosys last week also reported a higher-than-expected increase in its quarterly net profit and lifted its sales growth outlook for this fiscal year on signs of an economic revival in the United States and Europe.
TCS shares, however, are over-valued compared to Infosys. TCS trades at 21.2 times its forward earnings compared to 17.4 times for Infosys, according to Thomson Reuters data.
“The TCS stock was slightly overheated. Also, Infosys is emerging as a strong alternative,” said Ashish Chopra, a sector analyst at brokerage MotilalOswal Securities. “I don’t think there is any worry about outsourcing demand.”
India’s third largest software services provider Wipro is expected to report a 16 per cent increase in its quarterly net profit on Friday.