Brokerages positive on long-term prospects for TCS despite subdued Q1; stock rises 1.5%

Shares of Tata Consultancy Services rose 1.5 percent in early trade on July 13 even after the company posted a muted set of earnings for the quarter ended June. The optimism for the stock arises from the fact that most brokerages remain positive about the long-term prospects of the information technology major.

The country’s largest software services exporter registered a 16.8 percent increase in net profit on a year-on-year basis in the April-June quarter to Rs 11,074 crore, backed by strong growth in total contract value (TCV) deal wins despite a tough business environment. On a sequential basis, the bottomline fell 2.8 percent but still managed to top the analysts’ expectations of Rs 10,886 crore.

Consolidated revenue for the quarter came in at Rs 59,381 crore, reflecting a 13 percent on-year rise, but below the estimate of Rs 59,480 crore. Sequentially, revenue grew by a marginal 0.4 percent, the slowest growth in the last 12 quarters.

Moreover, the operating margin contracted to 23.2 percent from 24.49 percent in the previous quarter due to wage hikes announced on April 1. The company’s order book stood at $10.2 billion at the end of Q1, and the book-to-bill ratio stood at 1.4. This is marginally higher as against an order win of $10 billion in the last quarter.

At 09.19 am, shares of Tata Consultancy Services were trading with gains of 1 percent at Rs 3,293.10 on the National Stock Exchange.

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Brokerage firm JP Morgan has slashed its target price for the stock to Rs 2,650 from Rs 2,700 while retaining its ‘underweight’ call to factor in the subdued earnings. The firm also highlighted that the company was witnessing near term softness driven by uncertainty due to project pauses and deferrals.

Nomura has a slightly more bearish outlook for TCS as it maintained its ‘reduce’ rating for the stock, with a price target of Rs 2,800. However, the firm also believes that the company’s order book is holding up, but expects its near term visibility to be low. Moreover, the brokerage also feels that the company is unlikely to hit 25 percent operating margins in FY24.

Also Read: TCS Q1 Results: Net profit up 16.8% at Rs 11,074 crore, revenue at Rs 59,381 crore

On the other hand, Jefferies also pointed that a subdued book-to-bill ratio and muted headcount additions for the IT company indicates demand uncertainties. The company also reiterated rising caution among clients across key verticals in Europe and North America. In addition, the brokerage sees the scrip’s premium valuation limiting its upside potential. On that account, Jefferies has a ‘hold’ call for TCS, with a price target of Rs 3,450.

However, domestic brokerage Motilal Oswal Financial Services has a positive view on TCS, from a long-term perspective. “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,” the firm wrote in its report.

Further, MOFSL also expects TCS to benefit from its scale and ability to manage talent to control costs in the near to medium term. “This is especially visible in the fact that it has given timely increments despite growth concerns, which we expect to pay out over the medium term through easing attrition,” the firm highlighted. Accordingly, MOFSL has a ‘buy’ call for the IT major, with a price target of Rs 3,790.

Nuvama Institutional Equities feels that the cut discretionary spending is already known and priced in by the market but it also expects growth to bounce back in FY25, driven by a sustainable strong demand environment. When that happens, Nuvama pegs TCS as one of the biggest beneficiaries of this demand, driven by its capabilities in winning transformational as well as cost-takeout deals. Likewise, the brokerage firm rolled out a ‘buy’ rating for the stock, with a target price of Rs 4,000.

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