TCS ordered to pay $210 million to DXC Tech by US court; shares under pressure

Tata Consultancy Services (TCS) shares faced selling pressure on Tuesday after a US court ordered the Mumbai-based IT major to pay $210 million to Virginia-headquartered DXC Technologies in a case involving alleged misappropriation of source code. The stock of TCS, India's largest IT company, declined by as much as Rs 17.3, or 0.5 per cent, to Rs 3,440.3 apiece on BSE.

The alleged misappropriation of source code was to develop software platform TCS Bancs using DXC Technologies' software, Vantage-One and CyberLife. 

TCS denied the allegations and said that it was preparing to challenge the order.

The jury, in the Dallas, Texas Federal court, explained that TCS had accessed a trade secret by infringing upon CSC's proprietary platforms.

The jury maintained that TCS had wilfully and maliciously misappropriated both source and confidential documentation by improper means.

TCS had maintained earlier that it respectfully disagreed with the jury's advisory verdict, and that the matter would be decided by the court.

The lawsuit in this regard was filed in 2019. It was alleged that TCS allegedly stole DXC's trade secrets to develop competing life insurance software.

The news comes within a week of the US Supreme Court imposing a penalty of $140 million on TCS in an intellectual property case filed by Epic Systems.

Tata Consultancy Services has said it would make a $125 million provision in its financial results for the quarter ending December 2023 in relation to the lawsuit filed by Epic Systems.

Wisconsin-headquartered Epic had filed the lawsuit against TCS in 2014, alleging the IT services provider stole its intellectual property while it was contracted to implement Epic's healthcare software.

On November 20, the US Supreme Court rejected Tata Consultancy Services' appeal against a verdict passed by the District Court of Wisconsin, the IT company.

In a separate development, TCS announced a tie-up with Amazon Web Services (AWS) to launch a dedicated generative artificial intelligence practice. The IT major recently announced that it had imparted foundation training on GenAI for one lakh employees across the world.

TCS Q2 results: A mixed performance

TCS staged an overall mixed set of financial results for the fiscal second quarter, wherein its revenue fell short though other parameters were largely in line with analysts' estimates.

The Tata group IT major reported a 2.4 per cent sequential increase in consolidated net profit to Rs 11,342 crore for the quarter ended September 30, while its revenue grew 0.5 per cent to Rs 59,692 crore. 

The company's earnings before interest and taxes (EBIT) increased 5.3 per cent on a quarter-on-quarter basis to Rs 14,483 crore and its margin improved by 110 basis points to 24.3 per cent.

The IT company's board announced a buyback to the tune of Rs 17,000 crore with a record date of November 25.

How analysts view TCS

Analysts say that even as IT companies are witnessing strong deal wins, their annual contract value (ACV) appears to be weak on account of longer tenured deals.

According to IDBI Capital Markets, IT companies have a muted revenue outlook in the near term given furloughs in the October-December period and budgeting in the final quarter of the financial year. 

"Cancellations, delays and reprioritisation continue to impact discretionary spending. In the near term, we expect weakness in the American region to continue. This is further evidenced by the fact that the cut in the guidance of Infosys and the weaker-than expected guidance in Wipro. We expect the exit of Q4 and mega deal wins will be a key indicator of FY25E growth. We expect mid-caps to continue to outperform large caps (considering its diversified presence which will make them more susceptible to macro shocks across sectors," wrote analysts at the brokerage in a research report. 

"Considering weak macro and absence of demand revival, IT companies have multiple levers to improve margins in terms of utilisation, lower sub-contracting, lower attrition and pyramid. Hence we expect IT companies to maintain their margins in the near term," they added. 

IDBI Capital has a 'hold' rating on TCS with a target of Rs 3,740, which implies an upside of 8.2 per cent from the previous close. TCS is among the 11 stocks in the brokerage's IT coverage. 

The analysts also pointed out that the IT space witnessed challenges in the July-September period owing to macroeconomic conditions that impacted revenue growth. 

Should you buy, sell or hold TCS shares now?

Analysts remain largely positive on the IT space from a long-term perspective.

According to Kotak Institutional Equities, which has a 'neutral' view on the Indian IT space, analysis of American and European BFS firms' earnings calls indicates a continuing focus on expense management leading to planned headcount reductions or/and restructuring in several cases.

"Cost management measures can lead to closer scrutiny on tech budgets impacting recovery in discretionary spending and consequently growth in CY2024. Expect more large cost take-out opportunities for Indian IT. TCS, Infosys, HCLT and in select cases LTIM, Mphasis and Coforge are betterpositioned. Weaker vendors in the client ecosystem are at higher risk of getting impacted by cost take-outs and continuation of insourcing agenda of select firms. Wipro and CTSH are vulnerable, in our view European banks adopt cautious stance as well Similar to the US, the focus is on getting cost savings," analysts at the brokerage wrote in a research report dated November 1.  

Even European banks adopt a cautious stance, they pointed out. "Select banks such as HSBC and Nordea highlighted elevated current spending on technology but did not provide indication on 2024 spends," they stated. 

Indian IT companies rely heavily on exports and earn the lion's share of their revenue from the American and European markets. 

"In the long term, we continue to be optimistic on the IT sector wherein TCS and Infosys would remain investors' favourite counters to hold," said Prashanth Tapse, Research Analyst-Senior VP Research at Mehta Equities. 

With inputs from agencies

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