TCS Q1 earnings remain subdued: What should you do with the stock now?

In the June quarter (Q1FY24), IT major Tata Consultancy Services (TCS) posted a 17 percent year-on-year (YoY) jump in its consolidated net profit at ₹11,074 crore versus ₹9,478 crore in the year-ago period. Sequentially, the net profit dropped around 3 percent.

Meanwhile, its consolidated revenue for the quarter under review rose 13 percent to ₹59,381 crore during the quarter ended June as against ₹52,758 crore in the corresponding quarter last year. Sequentially, it was up just 0.4 percent from ₹59,162 crore in Q4FY23.

While the net profit was above estimates, the revenue came in below Street expectations.

In constant currency terms, TCS’ revenue grew about 7 percent YoY. The company’s order book stood at $10.2 billion.

“We remain confident in the longer-term demand for our services, driven by the emergence of newer technologies,” said K Krithivasan, Chief Executive Officer and Managing Director of the company.

“We are investing early in building capabilities at scale on these new technologies, and in research and innovation, so we can maximize our participation in these opportunities,” he added.

Stock price trend

The stock rose over 3 percent in intra-day deals today. It has gained around 11 percent in the last 1 year and 2.5 percent in 2023 YTD.

It has added 1.3 percent in July so far, extending gains for the fourth straight month.

Meanwhile, in the past 3 years, the stock has advanced 54 percent.

What brokerages say:

Brokerages remained mixed on the stock after its June quarter results. Most of them have reduced their earnings estimates on the back of the subdued results this quarter.

Motilal Oswal

The brokerage retained its ‘buy’ call on the stock with a target price of ₹3,790, indicating a 16 percent upside. Given its size, order book and exposure to long-duration orders and portfolio, TCS is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth, it said. 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, added MOSL.

The brokerage further noted that TCS remains cautious about near-term demand amid adverse macros, while it is quite optimistic about the secular long-term trend. The weakness persists in verticals like BFS, Communication, and Retail due to a slowdown in discretionary spending, while the focus is shifting to efficiency-driven projects. The management also indicated that the small deals are getting scrutinised and taking more time to ramp up, it added.

"While we have trimmed our estimates for FY24, we continue to expect TCS to deliver superior growth in the near term among our Tier 1 coverage on account of its leadership in cost efficiency, which has resulted in strong inflows for the last two quarters. We expect the trend to continue, providing better visibility for FY25 revenue growth despite an uncertain demand environment. We factor in a USD revenue CAGR of 10.7 percent over FY23-25E," it forecasted.

Nuvama

"The strong deal flow momentum, despite the uncertainty in the decision-making process, reinforces our positive stance on the sector. Given revenue deceleration in FY24, impacted by a cut in discretionary spending, is already known and priced in, we expect growth to bounce back in FY25, for the entire sector, driven by a sustainable strong demand environment. TCS shall be one of the biggest beneficiaries of this demand, driven by its capabilities in winning transformational as well as cost takeout deals – as manifested in its deal wins in Q1. We retain ‘buy'," said the brokerage in its report.

HDFC Securities

The brokerage has retained its ‘add’ call on the stock with a target price of ₹3,710, implying a 14 percent upside.

"Tata Consultancy Services (TCS) delivered a soft (in-line) performance in Q1 but recorded strong deal bookings which provide visibility despite challenging macros. Flat sequential revenue growth was impacted by broad-based weakness across verticals—BFSI, Communication & Media, Technology & Services while the remaining business grew," said the brokerage.

It expects constant currency revenue growth to moderate from 15.4 percent and 13.7 percent in FY22 and FY23 to 5 percent, 7.1 percent and 7.9 percent in FY24E, FY25E and FY26E, respectively. It has factored in EBIT margin at 24.4 percent, 25 percent and 25 percent for FY24E, FY25E and FY26E, respectively.

Axis Securities

The brokerage has a ‘hold’ call on the stock with a target price of ₹3,370/share (3350 earlier), implying an upside of 3 percent from the CMP.

"From a long-term perspective, we believe TCS has built a resilient business model by securing multiple long-term contracts with the world’s leading brands. It has also established robust capabilities that will enable it to gain market share moving ahead. However, prevailing uncertainties in large economies continue to pose short-term headwinds to the growth prospects of the company. The growth rate may slow down in FY24 due to uncertainties in the world’s largest economies. However, supply-side constraints are easing up, which will help the company to gain some margin expansion in the near term. While H2FY24 may see some revision on the demand side, the industry’s and the company’s long-term outlook remain robust," it said.

InCred Equities

The brokerage maintained its ‘hold’ rating on the stock with a target price of ₹3,265, indicating a very muted upside from its CMP of ₹3260.20 (as on July 12).

The brokerage noted that Q1FY24 revenue was largely in line but the EBIT margin missed estimate, adding that deal win growth is moderating and is unlikely to drive upgrades.

"We now model in a 6.8 percent US$ revenue CAGR (vs. 7.1 percent earlier) over FY23-25F but our PAT CAGR is largely unchanged at 11.4 percent PAT. We also retain our target PE/G multiple at 2x to arrive at a P/E multiple of 22.8x. Cash conversion (OCF/EBITDA was 76 percent over FY19-23) and healthy return ratios & payout (100 percent of FCF) provide a cushion, in our view. Stronger execution is an upside risk and moderation in the order book is a downside risk," it said

It expects 6.8 percent revenue CAGR, 10.2 percent EBIT CAGR and 11.4 percent PAT CAGR over FY23-25F.