TCS To Take $125 Million Hit In Q3FY24 Over US Lawsuit; Will EPIC Matter Impact Share Price?

India's largest IT firm, Tata Consultancy Services (TCS) is going to bear the brunt of $125 million due to a US lawsuit in the Epic Systems Corporation case. Although, Q3 of TCS will be impacted, however, its share price may shrug off the matter as traders are getting optimistic in the IT sector. TCS shares may see slight correction but would continue on its upside momentum ahead.

On BSE, TCS shares traded volatile! It ranged from the day's high and low of Rs 3,515 to Rs 3,481 apiece on the exchange. The stock opened in red at Rs 3,492.05 apiece.

Currently, TCS shares are trading marginally down to Rs 3,508.10 on BSE with a market cap of Rs 12,83,631.81 crore.

In its regulatory filing, TCS informed that in the EPIC Systems Corporation matter, the United States Supreme Court on November 20, 2023, rejected its petition to file an appeal against the orders passed by the US Court of Appeals, 7th Circuit, which confirmed the punitive damages award of $140 million passed by the District Court of Wisconsin.

Accordingly, TCS said, "The Company intends to make the balance provision of approximately $125 million in its
financial statements as an exceptional item, for the third quarter and nine months ending December 31, 2023."

A brief about the matter: EPIC Matter first filed a lawsuit against TCS back in 2014. It alleged that TCS had stolen its intellectual property and after a lengthy batter EPIC won a jury award of $940 million in 2016. Later, in 2019, a Wisconsin court judge reduced the award to $420 million. TCS had claimed that it made a $440 million letter of credit to EPIC Systems in 2018. Following this, the Wisconsin court reduced the verdict amount but upheld the appeal of TCS.

This led to the Tata Group-backed company filing a notice for appeal with the Seventh Circuit Court in Chicago.

Will this lawsuit impact TCS's share price?

Dhruv Mudaraddi, Research Analyst, StoxBox said that the USD 125 million charges relating to the lawsuit filed by US-based Epic Systems would have an impact on the third-quarter earnings of the IT behemoth, TCS. However, our sense is that the share price would not react too negatively to this development as it was an old lawsuit filed in 2014 by Epic Systems."

Mudaraddi added, "Also, at current valuations, we believe that market participants are becoming increasingly confident of the IT sector outlook from a medium to long-term perspective, given the strong order flows, improving operational efficiencies and improving global economic outlook amid hopes of an interest rate cut in 2024."

On a technicality, Jigar S. Patel, Sr. Manager - Equity Research at Anand Rathi said, "After making a double-bottom structure around 3330-3340, we saw a 200-point pump in TCS. Having said that, at the current juncture, TCS has stalled near 3525-3550 (refer to the chart). Before continuing its upside momentum, one can expect a small correction until 3400-3420."

During Q2FY24, TCS posted a consolidated net profit of Rs 11,342 crore, which is attributable to the shareholders of the company. The Q2FY24 PAT witnessed single-digit growths of 2.4% QoQ and 8.7% YoY.

On the top-line front, consolidated revenue from operations stood at Rs 59,692 crore, rising by a fractional 0.5% from Rs 59,381 crore in Q1FY24, but witnessed a growth of 7.9% from Rs 55,309 crore in Q2 of FY23. In constant currency, the revenue growth came in at 2.8% YoY. However, dollar revenue was $7.2 billion for the quarter, declining by 0.2% sequentially which is for the first time since the April-June quarter of FY20.

In the second quarter, the concerning factor was TCS' BFSI segment which contracted by 0.5%, while Communications and media dipped by 2.1% and Technology and services declined by 2.2%.

IT firms' communications & media, BFSI and IT services segments are under pressure due to continued challenging macro conditions. Earlier, Accenture whose over 40% of the total workforce is in India, warned of weaker IT spending in the coming quarters.

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