scorecardresearchTCS: Buy, sell or hold? Here's what 5 brokerages say on the Q3 results

TCS: Buy, sell or hold? Here's what 5 brokerages say on the Q3 results

Updated: 10 Jan 2023, 12:35 PM IST
TL;DR.
Brokerages remained mixed on the TCS post the results but have largely maintained their FY24 estimates. They are cautious on the overall IT industry and believe that high valuations will weigh on the IT major.
Brokerages remained mixed on the IT major post the results but have largely maintained their FY24 estimates. They are cautious on the overall IT industry and believe that high valuations will weigh on the IT major.

Brokerages remained mixed on the IT major post the results but have largely maintained their FY24 estimates. They are cautious on the overall IT industry and believe that high valuations will weigh on the IT major.

Tata Consultancy Services kicked off the earnings season on Monday, January 9, setting the tone for the industry which has been riddled with concerns in the past 1 year. The IT major reported muted earnings growth for the third quarter as clients tightened spending amid a challenging macroeconomic environment that prompted the country's top IT exporter to reduce its workforce.

For Q3FY23, the company posted an 11 percent year-on-year (YoY) rise in its net profit at 10,883 crore vs 9,806 in the year-ago period. Consolidated revenue from operations for the quarter came in at 58,229 crore, up 19.1 percent YoY from 48,885 in the same quarter last year. Though TCS beat the market estimate on revenue which was 57,207 crore; the company could not meet the net profit expectation of 11,064 crore.

In constant currency (CC) terms, the revenue rose 13.5 percent YoY led by growth in North America and the UK. Its operating margin came in at 25.4 percent, down 0.5 percent YoY.

The Mumbai-based company's order book for the October-December period stood at $7.8 billion, down from $8.1 billion in the September quarter. While the firm does not give guidance but the management is confident about the demand scenario and added that the technology spends are intact.

Stock price trend

The IT major fell as much as 2.6 percent in intra-day deals today to 3,231 on the back of its third-quarter earnings. In the last 1 year, the stock has shed nearly 14 percent.

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TCS stock price trend

Here's what brokerages say:

Overall, brokerages remained mixed on the IT major post the results but have largely maintained their FY24 estimates. They are cautious on the overall IT industry and believe that high valuations will weigh on the IT major.

Jefferies: The brokerage has maintained its hold call on the stock with a target price of 3,500, implying a limited potential upside of just 5 percent. As per the brokerage, TCS's Q3FY23 revenues beat estimates but profits were up 11 percent YoY missed due to forex losses. "While TCS has delivered healthy growth in Q3, falling headcount and book-to-bill ratio points to sharp growth moderation in FY24. We tweak our estimates slightly and expect TCS to deliver 11 percent EPS CAG Rover FY23-25. While TCS is better placed in a recessionary environment, its rich valuations will likely weigh on stock performance. TCS' premium valuations may limit upside," said Jefferies.

Nirmal Bang: The brokerage has a 'sell' call on TCS with a target price of 2,635, implying a downside of 20 percent. "TCS management held out a more optimistic view on demand in the foreseeable future compared to our expectation (though in line with consensus) after delivering a slightly better-than-expected performance in 3QFY23 (more on the revenue front and less on the margin front). 2.2 percent CC QoQ growth was higher than our estimate of 1 percent and indicated that the furlough situation was normal," noted the brokerage.

Nirmal Bang believes that revenue growth will likely be in the low-to-mid single digit, with margins not expanding in FY24 due to pricing pressure and normalisation of certain costs. It has an explicit view of a shallow recession in the US in CY23. Post 3QFY23, the brokerage has largely maintained its FY23/FY24/FY25 EPS estimates. While its overall estimates for FY24 have not changed much, it is now modeling in pressure starting in Q2FY24 rather than in Q1FY24. It added that the returns are likely to be sub-optimal.

Motilal Oswal: The brokerage has a buy call on the stock with a target price of 3,810, indicating an upside of 15 percent. As per the brokerage, the overall management commentary on the demand environment indicates caution in the near term despite consistent growth in the deal pipeline, as North America and continental Europe see a near-term deal conversion slowdown on account of macroeconomic challenges. But, TCS reiterated its aspiration of double-digit growth in the medium to long term. MOSL continues to see growth constraints over the next two quarters, although TCS should be relatively insulated on account of its strong deal backlog. While demand is expected to start normalizing by Q2FY24, reduced visibility remains a key risk on FY24 growth, noted the brokerage. It factored in a USD revenue CAGR of 10 percent over FY22-25E for TCS. It also believes that the sharp decline in quarterly annualized attrition should further help the company lower its backfilling and lateral hiring costs, and TCS' target of exiting FY23 at a 25 percent EBIT margin is not very challenging.

"Increase in interest rates, slow economic growth, and elevated geo-political tensions have adversely impacted the macro environment and raised concerns over IT spends. 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 best-in-class execution, the company has been able to maintain its industry-leading margin and demonstrate superior return ratios," said the brokerage. It has maintained FY23/FY24/FY25 EPS estimates. Over FY22-25E, it sees a USD revenue CAGR of 10 percent and an INR EPS CAGR of 15 percent.

Phillip Capital: The brokerage has a buy call on the stock with a target price of 4,000, indicating an upside of 20 percent. TCS reported a strong set of results – with revenue growth beating and margins in line with expectations. Growth was strong at 2.2 percent CC QoQ, while margins expanded by 50bps QoQ, said the brokerage. Management appeared confident of ending FY23 with 25 percent EBIT margins, which PC believes is achievable given operational efficiencies and the easing of supply-side pressures. It also expects TCS to be one of the big beneficiaries of the overall positive demand environment given its multiservice and multi-vertical offerings. It also sees TCS continuing to command a valuation premium to its large-cap peers, on the back of its strong diversified profile, superior return profile (ROE of 43 percent in FY22), management stability, strong margins and market leadership position.

Reliance Research: The brokerage maintains a sell call on the stock with a target price of rs 3,110, indicating a downside of 6 percent. It believes that IT Services would not remain immune to worsening global macros in terms of rising inflation, economic slowdown, currency headwinds and likely cut on spending in FY24E. Revenue growth would taper down to single digit in FY24E, while QoQ decline in the order book, limited margin improvement and lower pricing power ahead would lead to a valuation of multiple contractions close to its historical averages, said the brokerage. Due to lower earnings growth, lower deal wins and valuation, it maintains SELL on TCS.

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Source: Nirmal Bang
First Published: 10 Jan 2023, 12:35 PM IST