Cautious analysts have lowered growth estimates of TCS after its Q2 revenue fell below street estimates. Even though the IT major expects Q3 and Q4 to be better than usual and aims to maintain margins within guided band of 26-28 percent, analysts say that macro uncertainty persists, while impact of Brexit and US elections are unknowns.
While TCS had warned about slowdown in the US BFSI segment, lower growth surprisingly came in from retail consumer packaged goods (CPG). The management also sounded cautious calling Q2 an unusual quarter, highlighting holdbacks in discretionary spending. Softer BFSI, delay in ramp-ups in retail and delayed revenue in India led to 1 percent sequential growth in constant currency.
Though most analysts have revised target price, growth estimates and earnings per share (EPS) for full year, there has not been any major downgrade yet.Deutsche Bank maintains buy rating on the stock with a revised target price of Rs 2900 stating that project delays hurt revenue growth but margin beat a big positive. Given macroeconomic headwinds, it assumes a conservative stance and now expects TCS to deliver 7.1 percent YoY USD revenue growth with EPS of Rs 135.6.
CLSA also retains buy rating expecting growth to rebound to 10 percent in FY18. It has set a target of Rs 2850 per share. It says India revenues should bounce back in 3Q, while retail projects could ramp in 2HFY17 even as near-term visibility remains soft. "Stronger execution, client relationships, digital wins and stable management keep the stock as our cross-cycle favourite. Growth recovery to double digits, margin recovery and dividend yields leave TCS looking attractive," it says in a report.
Meanwhile, Morgan Stanley is equalweight on the stovk with target price of Rs 2235 per share warning that price to equity (P/E) multiples could have downside in a low-growth environment. It has slashed USD revenue forecasts by 1-4 percent for FY2017-19 to reflect weak performance so far and uncertain macro environment.
However, it has increased margin assumption to 25.8 percent in FY2017-18. While FY2017 earnings estimate is increased 0.9 percent, it has cut FY 2018-19 forecasts by 1.4 percent and 3.7 percent, respectively.
JP Morgan is neutral on the stock with a target price of Rs 2550 per share. It says disappointment in revenue performance continued while digital also slowing down is a worry but margins shone in Q2.
It reasons that EBIT margins were fare better than expected but revenue growth is key to sustaining a high P/E, not margins so much. “So, TCS’s continually moderating revenue growth does not necessarily help sustain P/E given our empirical observation that P/E multiples for high P/E stocks such as TCS are far more sensitive to top-line led growth than margin-led growth,” JP Morgan says.
Macquarie has downgraded the stock to neutral from outperform with a target price of Rs 2396 from Rs 2847 per share. It has reduced FY18 earnings by 5 percent to factor in lower USD revenue growth. It says due to persistent headwinds near term and a pushback in discretionary expenditures, recovery in USD revenue growth in FY18E will be gradual. It says that despite cross-currency headwinds and USD 26 million paid for settling an old suit, TCS delivered a 26 percent EBIT margin as it used some of its levers, such as applying for lower visas and subcontracting expenses.
It expects TCS to deliver a 26.5 percent, EBIT margin in FY17/18 and stay in its margin band of 26–28 percent in FY17.
Bank of America Merrill Lynch also maintained it underperform rating and lowered FY18-19 earnings per share by 2-3 percent and target price to Rs 2375.Shares of TCS rose over 2 percent intraday Friday. At 11:16 hrs TCS was quoting at Rs 2341, up Rs 12.50, or 0.54 percent on the BSE.
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