TCS at 18-month low: No de-rating post Q3, analysts unperturbed

Moneycontrol Bureau TCS October-December revenue disappointed for sixth consecutive quarter but that is definitely not worrying analysts. Most analysts are still positive on the IT major but have slashed target price and tweaked revenue growth estimates. Even after Q2 results, most analysts were bullish on the stock though it had fallen almost 4 percent reacting to earnings. Shares of TCS fell 3 percent intraday on Wednesday. Few positive about Q3 result is its hold on attrition level, falling to 15.9 percent from 16.2 percent (Q-o-Q) reversing several quarters of increases. The digital business also grew 4 percent, contributing 14 percent of revenue. Maintaining buy rating, Goldman Sachs has reduced target price to Rs 2600 from Rs 2670 per share as it believes TCS's sector-leading cash returns justify its 15 percent premium versus sector on FY17. It has also changed its FY16-FY18 earnings per share (EPS) by up to 1 percent factoring in Q3 revenue growth miss.  Barclays retains overweight rating on TCS due to attractive valuations but lowers FY16 USD revenue growth estimate by 1.5 percent and reduced target price to Rs 2780 from Rs 2925. "Ongoing Japan integration challenges and weakness in Diligenta platform persisted during the quarter while drag in India and Chennai floods came as one-offs. Management highlighted four key issues during FY16 (energy vertical, Diligenta, Japan and Lat-America) and added that except Japan integration, all should be resolved during FY16 itself," it states in a report.

Credit Suisse maintains outperform rating but have adjusted EPS by 0.5-(1.7) percent for FY16- 18 and slashed target price to Rs 2900 (from Rs 3000) to reflect earnings. The brokerage considers TCS as a better choice among large Indian names and thinks with steady outlook and currency weakness, the sector can be defensive. TCS' revenue has disappointed, albeit slightly, for a few quarters now, and valuations are not exactly cheap, it feels. "Nothing unduly worrying about the 2016 outlook so far. While TCS is still collating clients' feedback, it has heard nothing negative on 2016 IT budgets so far. The key segments seem okay. Subdued headline numbers, even relative to low expectations. TCS' revenue grew by 0.5 percent Q-o-Q in constant currency, below the already subdued market expectations, impacted by volatility in India business and floods in Chennai," Credit Suisse says in a report.

Kotak retains add rating with a revised target price by 6 percent to Rs 2525 per share. It says that slowing growth rate calls for derating and cut FY 2016-18 EPS by 2-3 percent.

"TCS missed lowered growth expectations once again, underling the portfolio challenge, high concentration of business in diminishing returns’ run-thebusinessservices and lack of play in consulting. Positives are portfolio challenges nearing an end and core business metrics remaining healthy," Kotak adds.