Tata Consultancy Services (TCS) is an IT services, consulting and business solutions provider. TCS offers a consulting- led, cognitive powered, integrated portfolio of business, technology and engineering services and solutions. It is the largest IT services exporter in India.
Muted Margins combined with macroeconomic uncertainty
TCS delivered muted performance in Q3FY19 with consolidated revenue growth of 0.7% QoQ in dollar terms due to cross-currency headwinds. EBIT margin decreased by 90bps QoQ basis which came in below market expectation at 25.6% weighed down by higher subcontracting and employee costs due to increased hiring to meet demand. Management indicated that this pressure on margins is likely to remain.
Macro uncertainty (possible slowdown in US economy), absence of rupee benefit, caution in Europe and the UK from BFS vertical and absence of mega deal wins (as seen in FY19) casts a doubt on sustainability of growth in FY20E and FY21E.
TCS gave a whopping return of 73% in the calendar year 2018-2019. In Oct-18 the stock got some beating. The stock lost 21.5% in only one month. Such a sharp fall in one month is definitely a very negative indication. It is a first indication of a change in trend. That the bear candle has come right on the highs is further indication that the bears are in charge. After the fall the stock has gone sideways for the past four months now. Therefore the current sideways movement is seen as a continuation of the fall in the month of Oct-18. On the weekly charts the RSI has made a lower high and the RSI has turned from the bear zone of 60-65. Therefore the momentum indicators on the weekly charts are indicating weakness now. Fibonacci analysis is indicating 1613-1634 as a good support for the stock and then 1424. The first Fibonacci confluence zone at 1613-1634 is the minimum the stock is expected to come down to. In percentage terms it is 16.5% from the current levels of 1935.