Top brokerage firms remain positive on TCS after CEO's surprising resignation; here's what they say

Shares of Tata Consultancy Services (TCS) traded lacklustre a day after the company announced the resignation of its chief executive officer (CEO) Rajesh Gopinathan.

TCS named K. Krithivasan, 59, as the CEO-designate of the company.

Gopinathan has been with TCS since 2001 and has held multiple leadership positions, including that of CEO.

Krithivasan joined TCS in 1989 and has held various leadership roles in the company. He has been part of the global technology sector for over 34 years.

The announcement surprised many, including TCS employees. As reported by Mint, the choice of Krithivasan is a departure from the past. The last two CEOs were in their 40s when they were appointed. Chandra was 45 when he took over in 2009, while Gopinathan was 46 when he became CEO in 2017.

TCS’s retirement age is 60 but executives who are on the board can continue until 65.

While the announcement was surprising, it is unlikely to create a long-term overhang on the stock. Many brokerage firms expect the transition to be smooth as it happened in the past.

Brokerages remain positive on TCS

Brokerage firm Motilal Oswal Financial Services has maintained a 'buy' call on the stock with a target price of ₹3,810, implying a 20 percent upside potential.

Motilal recommends adding the stock on any near-term weakness due to the news of the CEO's resignation.

Motilal highlighted that given TCS’s size, order book, and exposure to long-duration orders, and portfolio, it is well-positioned to withstand the weakening macro environment and ride on the anticipated industry growth.

"Owing to its steadfast market leadership position and the best-in-class execution, the company has been able to maintain its industry-leading margin and demonstrate superior return ratios," said Motilal Oswal.

"We continue to see TCS as the best play in the IT services space in the current environment. It is focused on cost optimisation and vendor consolidation, both of which are its strong areas. TCS is also poised to gain from a favourable pyramid mix change to improve margins in FY24, ahead of its peer group," Motilal Oswal said.

Motilal Oswal expects a dollar revenue CAGR of about 11 percent and an INR (Indian rupee) EPS (earnings per share) CAGR of nearly 16 percent over FY23-25.

Brokerage firm Nuvama Wealth Management has a 'buy' call on the stock with a target price of ₹4,100, implying a 29 percent upside.

The brokerage firm highlighted while the change in CEO comes as a surprise to everyone; it views this development as the continuation of a trend at TCS, wherein the baton shall be passed from one veteran to another.

Nuvama said any drop in the stock price must be used as an opportunity to add as valuation is no longer expensive, which makes the risk-reward profile attractive.

ICICI Securities upgraded the stock to a 'buy' from an 'add', fixing the target price of ₹3,834.

ICICI expects the CEO transition to be smooth, since Krithivasan has been with the company for 34 years, serving various

customer-facing leadership roles and heading the largest industry vertical, BFSI.

ICICI pointed out that this appointment is in line with TCS’ strategy of succession planning well in advance and grooming internal employees to take on leadership positions. Additionally, Rajesh Gopinathan will also be available to support this transition over the next six months.

"We continue to value TCS at 25 times FY26E EPS of ₹172 (discounted back one-year with WACC of 12 percent) to arrive at our 12-month target price of ₹3,834, implying nearly 20 percent upside. Our estimates of 10 percent dollar revenue CAGR and 14 percent EPS CAGR over FY23-26E remain unchanged. We upgrade the stock to a 'buy' on the recent correction in the share price. TCS is currently trading at 21 times and 18.5 times on FY25E and FY26E EPS, respectively," said ICICI Securities.

Kotak Institutional Equities also maintained an 'add' rating on the stock with a target price of ₹3,500.

Among the global brokerages, Morgan Stanley (MS) has maintained an 'equal-weight' view on the stock with a target price of ₹3350, as reported by CNBC-TV18.

MS, as per CNBC-TV18, said the planned resignation of the CEO has come as a surprise and may create a short-term overhang. However, MS expects the transition to be smooth and well-managed, as seen in the past.

MS believes the stock may not underperform in the coming months.

CLSA maintained an 'outperform' view on the stock with a target price of ₹3,550 as it believes the transition in leadership will be smooth and there may be a minimal impact on the business, CNBC-TV18 reported.

CLSA believes, as reported by CNBC-TV18, that succession planning could become a point of focus, especially for long-term investors.

Bernstein maintained an 'overweight' view on the stock with a target price of ₹3,840 even as it believes the unexpected CEO change may bring volatility amid weak macro and rebuilding competition, reported CNBC-TV18.

Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.