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TCS signals recovery in Q2 amid washed out Q1

It would be a tough call to make for investors tracking the June quarter numbers of Tata Consultancy Services (TCS). At one end, it was a quarter botched up by the widespread pandemic with a higher than expected decline in revenue and operating margin, and pressure on majority of the verticals. But at the other end, it was the hope and optimism that the worst might be behind, bolstered by relatively strong new order bookings and the management’s expectations of a recovery starting from as early as the September quarter.What may reassure investors amid the chaotic signals is the management’s comments that the impact of the pandemic seems to have bottomed out as a recovery is visible across the European market, which contributes nearly one-third to the topline.In addition, the country’s largest software exporter also highlighted a more resilient and adaptive response form clients in the US, which is its biggest market contributing a half to the revenue and also the most affected by the pandemic. It expects the major segments of banking, finance, and capital markets to recover in the second quarter of the fiscal in Europe and by the third quarter in the US. The manufacturing vertical is likely to show improvement by the fourth quarter. These verticals together contribute over 40% to the revenue. Other verticals of media, communication and life sciences, which form nearly 15% of the revenue also showed deal momentum in the June quarter. The retail segment, which contributes 15% to the revenue is expected to take more time to recover given the direct impact of the virus outbreak though some of its clients in the grocery chain have shown recovery.On the financial front, the sequential drop of 7.1% in the reported revenue of $ 5,059 million for the June quarter was the worst in at least 12 years, surpassing the 5.8% decline in the December 2008 quarter amid the financial crisis in the western economies. The operating margin shrank by 150 basis points sequentially to 23.6% in the June2020 quarter.While the first quarter impact was worse than anticipated, investors may find solace in the fact that the company was able to bag $ 6.9 billion worth of new orders, which was around 20% of the FY20 deal wins. The management expects its performance in the rupee terms for the third and the fourth quarter to return to the levels seen in the respective quarters of the previous fiscal.At Thursday’s closing of Rs 2,204.4, the stock was traded at a trailing price-earnings multiple of 26.5, which looks steeper due to the sharp 12.9% sequential drop in the first quarter profit of Rs 7,008 crore. This may limit any major uptick in the stock price in the near term until the company demonstrates restoration of profits and profitability at the pre-pandemic levels.