Oct 13, 2017 10:12 AM IST | Source:

TCS’ shares gain 2% post Q2 results; brokerages remain mixed

Brokerages remain mixed on the results, but highlight that there were some sectoral gains seen in the September quarter performance.

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TCS gained over 2 percent intraday as investors digested the company’s earnings numbers that it declared on Thursday.

The IT major’s second quarter (July-September) earnings beat analysts' expectations on Thursday as consolidated profit rose 8.4 percent sequentially Rs 6,446 crore, backed by robust volume growth and operational performance.

Consolidated revenue during the quarter grew by 3.2 percent to Rs 30,541 crore on sequential basis, with volume growth of also 3.2 percent, driven by all industry verticals except retail and CMI.

"We experienced robust volume growth in Q2, driven by good demand across multiple industry verticals," Rajesh Gopinathan, CEO & MD said.

Dollar revenue growth for the quarter was also 3.2 percent at USD 4,739 million compared with previous quarter, which was slightly ahead of estimates (of USD 4,731 million).

Constant currency revenue growth was 1.7 percent in Q2, driven by digital service offering.

Digital revenue, which contributed 19.7 percent to total revenue, grew by 5.9 percent (in constant currency) in the quarter gone by.

"Large deal wins in Q2, a good pipeline, and bottoming out of retail sector softness positions us well," Gopinathan said.

Brokerages remain mixed on the results, but highlight that there were some sectoral gains seen in the September quarter performance.

Brokerage: Macquarie | Rating: Neutral | Target: Raised to Rs 2,375

The global research firm highlighted that sluggishness continued in banking space, while retail was bottoming out. Meanwhile, deal sizes in digital have begun to rise. It expects dollar revenue growth for the firm and Infosys to converge to 8 percent year on year in FY19. Going forward, it expects the firm to share more granular details of new services lines in the second half.

Brokerage: Kotak | Rating: Reduce | Target: Rs 2,549

The brokerage house highlighted that the firm reported strong margin recovery even as revenue growth disappointed. The constant currency growth of 1.7 percent is lower than estimates of 2.1 percent. Meanwhile, volumes grew 3.1 percent, which implies pricing decline of 140 basis points on a CC basis. It also observed that retail and newly-carved out regional markets were contributing to the weak performance.

Brokerage: Credit Suisse | Rating: Neutral | Target: Rs 2,350

Credit Suisse said that the company’s revenue growth still showed lack of momentum. Having said that, it has been able to make the transition towards digital well, while US, financial services and retail remain soft. Moreover, EBIT margins in-line with its

estimates, but higher than consensus.

Brokerage: Deutsche Bank | Rating: Buy | Target: Raised to Rs 3,000

The financial services firm observed that earnings were a beat in the second quarter, and there were early signs of a demand revival. It said that the impact of revenue miss was offset by improvement in operating margins. Further, the improvement in earnings is on deal wins in insurance and finance along with a turnaround in retail. It expects the firm to deliver 12.3 percent earnings CAGR over FY18-20 and it has also increased FY18/19 operating earnings forecasts by 4-5 percent.

Brokerage: Edelweiss Sec | Rating: Hold | Target: Rs 2,315

The brokerage observe that the firm’s strong execution lead the margin beat. In terms of sectors, digital and retail looked good, while BFSI’s turnaround was awaited. The firm’s limited margin levers will impinge on the company’s earnings growth.

Brokerage: HSBC | Rating: Hold | Target: Rs 2,380

HSBC said that it liked TCS’ ability to drive through tech cycles, but high base and valuations are currently limiting the stock upside.

Brokerage: Morgan Stanley | Rating: Underweight | Target: Raised to Rs 2,250

The brokerage believes EPS growth could improve in FY19, but valuations are stretched. It lowered FY18 constant currency revenue growth estimate to 6% from 7.4% and increased FY18 margin assumption to 24.9% from 24.6%.

Brokerage: CLSA | Rating: Buy | Target: Raised to Rs 2,970

The company’s Q2 was mixed with a third-successive quarter of soft CC revenue growth on QoQ. A growth recovery in insurance and retail could precede US banking recovery. It also said that growth recovery appears more likely from the fourth quarter, while strong margin performance drives 2-4 percent upgrades to its estimates.
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