TCS Q4 profit up 14.8% YoY. What should investors do with stock?

TCS Q4 result | The company’s consolidated revenue from operations came in at Rs 59,162 crore, up 16.9 percent, from Rs 50,591 crore in the year-ago quarter. Brokerages have a mixed view on on weaker-than-expected quarter for India’s largest IT services company

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Tata Consultancy Services (TCS) will be in focus on April 13, a day after India’s biggest IT services company reported a 14.8 percent year-on-year (YoY) increase in consolidated net profit at Rs 11,392 crore for the quarter ended March 31, 2023.

The company reported a profit of Rs 10,846 crore in the December 2022 quarter.

Consolidated revenue from operations came in at Rs 59,162 crore, up 16.9 percent, from Rs 50,591 crore in the year-ago quarter. It stood at Rs 58,229 crore in the December quarter of FY23.

Analysts had estimated the Tata Group company to report 2.1 percent quarter-on-quarter (QoQ) growth in revenue, while net profit was projected to increase 6.2 percent QoQ in the January-March quarter.

In constant currency (cc) terms, the revenue rose 10.7 percent year-on-year (YoY), the company said.

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Here is what brokerages have to say about stock and the company after March quarter earnings:

JPMorgan

JPMorgan has maintained “underweight” rating on the stock with the target price of 2,700 a share. TCS’s Q4 results missed due to unexpected weakness in the US and continued challenges in Europe, it said. The outlook for TCS has been clouded by client caution driving cuts to discretionary tech spends.

While headline signings are healthy, delayed/deferred discretionary projects will delay billing. The uncertain macro and tech spends should drive a softer H1FY24, pulling down FY24 growth.

JPMorgan has cut its revenue estimate by a percent and margin by 20 basis poins (bps), driving 2 percent EPS cuts.

One basis point is one-hundredth of a percentage point.

Citi

Foreign broking house Citi has kept “sell” rating with a target price of 3,000 a share. The brokerage said TCS’s Q4 results were weaker than expected and valuations are still high.

Firstly, TCS’s FY23 TTM TCV (total contract value) is flattish YoY compared to over 10 percent YoY growth in FY22, which is a forward-looking indicator.

Secondly, the headcount for FY23 is expected to be over 4 percent YoY versus 21 percent YoY growth in FY22. Finally, the management commentary has turned incrementally cautious, which is also a forward-looking indicator.

With regular wage hikes, margin estimates may need to be revised down, it said.

Bernstein

Bernstein has given TCS an “outperform” rating with a target price of 3,560 a share. The firm said TCS had a soft quarter amid macro headwinds but the order book remained healthy. Additionally, the book-to-bill ratio improved to 1.39x compared from 1.1x.

However, TCS’s management indicated that the near-term outlook is uncertain in North America and BFSI (banking, financial services, and insurance). Clients are reportedly reducing discretionary spends and non-critical deals, and focusing on cost optimisation.

CLSA

CLSA also kept “outperform” rating on the stock, with a target price of Rs 3,550. TCS had a weak Q4 print but the healthy order book is reassuring for the mid-term outlook, it said.

Near-term uncertainties and non-committal management commentary may weigh on the stock. The firm expects TCS’s structural strengths and 4 percent dividend yield to lend support.

Jefferies

Jefferies has given TCS a “hold” rating with a target price of Rs 3,375 per share TCS’s Q4FY23 results missed estimates and there is rising caution among clients across several verticals in Europe and North America. The book-to-bill ratio is at a three-year low and headcount additions are subdued, which point to a slowdown.

Jefferies has cut its estimates for TCS by 2-3 percent but expects the company to deliver 6.7 percent CAGR in constant currency revenue and 10 percent EPS CAGR. TCS’s premium valuations, however, are limiting the upside, it said.

Morgan Stanley

Morgan Stanley is “equal weight” on the stock with a target price of Rs 3,350. The weak macro backdrop has impacted TCS’s Q4 results, and there is limited clarity on whether sentiment has troughed despite a strong order book.

Lower attrition-led margin tailwinds would be offset by weak operating leverage. The valuation of TCS is higher than its long-term average and the brokerage does not find the risk-reward attractive at this time.

Morgan Stanley has lowered its FY24/25 EPS estimates by up to 1 percent.

Nomura

Nomura has a “reduce” rating on TCS and has cut the target price to Rs 2,850. The Q4 result disappoints, both on revenue and margin front. The near-term visibility, too, is low for the company. The weak headcount additions continue on lower discretionary revenues.

TCS missed its Q4FY23 margin exit guidance, which is attributed to lower discretionary revenues. Nomura has cut its earnings estimates for FY24-25 by 1-2 percent.

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