Moneycontrol
Jan 13, 2017 03:02 PM IST IST | Source: Moneycontrol.com

TCS slips 4% despite steady Q3, analysts wary of Chandra exit

Citi has a sell rating on the stock with a target of Rs 2175 per share stating that leadership transition will be key from the company's perspective.


Shares of Tata Consultancy Services (TCS) slipped 4 percent intraday Friday despite delivering steady December quarter. Investors are cautious about the leadership transition at the IT service company while H1-B visa issue still persists. In a surprise move, Natarajan Chandrasekaran, CEO and Managing Director of TCS has been named the new Chairman of Tata Sons, roughly three months after the former Chairman Cyrus Mistry was unceremoniously ousted. Rajesh Gopinathan, currently CFO and Vice President, TCS will take the position of CEO after Chandrasekaran's move.

So, should you sell the stock now?


Bank of America Merrill Lynch has reiterated underperform rating with target at Rs 2130 per share as it thinks proposed hikes to H1-B minimum wage may see an earnings risk of 5 percent for every 10 percent increase.


Nomura has retained cautious stance maintaining neutral rating and a target at Rs 2250 per share. It feels that material acceleration in FY18 seems unlikely while margin guidance could be difficult to achieve.

Reliance Securities has a reduce rating with a target of Rs 2200. It is concerned  that this is not an apt moment to rock the boat for TCS, especially considering
Chandrasekaran’s vast expertise and connect with major clients. "Though we realise this is a strategic decision taken with a view to stabilising the turbulent waters at Group level, we remain concerned about the consequential impact on TCS." it adds.

It has marginally revised earnings per share (EPS) estimates upwards by 1 percent for FY17 and FY18. Given single-digit EPS growth, it believes valuations
are expensive.


Edelweiss has a hold rating on the stock with a revised target of Rs 2475 per share as it continues to believe that limited margin levers constrain TCS earnings
growth. However, it believes, elevation of an insider to the CEO’s post will ensure smoother transition and continuation of the company’s strategy.


"While we admit that change in outlook of BFSI vertical will be a huge positive for the sector and TCS, we believe the company’s excellent execution implies limited margin levers and thereby limited earnings growth," it says in an note.


With a bullish stance, Ambit thinks leadership transitions are tricky in IT services but odds are in favour of a smooth transition. It likes TCS because it is best-in-class and current valuation of 17 times one-year forward earnings.


The management pointed out that consensus estimate of negative margin impact from the recent US visa bill was overstated. TCS has already been tweaking its business model to offset protectionism risks.


The country's largest IT services provider's third quarter (October-December) profit increased 2.9 percent sequentially to Rs 6778 crore, driven by the strong digital business and great execution work. It touched USD 1 billion-mark in profit for the first time.


Revenue during the quarter increased 1.5 percent to Rs 29,735 crore and dollar revenue growth was 0.3 percent at Rs 4,387 crore compared with previous quarter.


Constant currency revenue growth for the quarter was at 2 percent with volume growth of 1 percent on sequential basis.


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