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Last Updated : Jul 11, 2018 03:53 PM IST | Source: Moneycontrol.com

TCS at record close; analysts turn mixed as strong Q1 and better growth visibility largely priced in

Overall brokerage houses turned mixed after better-than-expected quarterly earnings and strong growth visibility going ahead.

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Share price of Tata Consultancy Services rallied 5.59 percent to end at record closing high of Rs 1,979.90 on Wednesday as the company kicked off June quarter earnings season on a strong note with the profit growing 6.3 percent and revenue 6.8 percent sequentially, backed by recovery in banking vertical and maintaining momentum in industry verticals.

TCS' weightage in the Nifty for today was 4.93 against 4.65 yesterday and its market capitalisation of Rs 7.6 lakh crore is Rs 2 lakh crore more than its peers Infosys (Rs 2.91 lakh crore), Wipro (Rs 1.32 lakh crore) and HCL Technologies (Rs 1.38 lakh crore) combined.

The stock price was quoting at Rs 1,987.60, up Rs 110.60, or 5.89 percent, at 14:45 hours IST.

The IT services company has reported profit at Rs 7,340 crore for the quarter against Rs 6,904 crore in previous quarter and in same period revenue from operations increased to Rs 34,261 crore from to Rs 32,075 crore.

Analysts estimated profit for the quarter at around Rs 7,000 crore and revenue Rs 34,000 crore.

Dollar revenue in Q1 grew by 1.6 percent quarter-on-quarter to $5,051 million while constant currency revenue growth stood at 4.1 percent QoQ, the highest in last 15 quarters.

Digital revenue contributed 25 percent to total revenue, growing 44.8 percent YoY against 42.8 percent growth in Q4FY18.

"We are starting the new fiscal year on a strong note, with the growth engine firing on all cylinders," CEO and MO, Rajesh Gopinathan said in company's filing.

"Banking vertical recovered very nicely this quarter, while other industry verticals maintained their momentum," he added. "With a good set of wins during the quarter, a robust deal pipeline and accelerating digital demand, we are positioned well for the future."

The country's largest software services exporter's revenue growth accelerated in BFSI (up 4.1 percent YoY and 3.7 percent QoQ) and Retail & CPG (up 12.7 percent and 3.6 percent) in Q1.

North America business bounced back growing 7 percent YoY (3.7 QoQ) on the back of BFSI and Retail recovery. UK business showed 18.7 percent rise YoY (8.2 percent QoQ), Continental Europe 18.6 percent (5.3 percent QoQ), and AsiaPacific 10.8 percent (3.6 percent QoQ), which all led the overall growth.

Overall brokerage houses turned mixed after better-than-expected quarterly earnings and strong growth visibility going ahead.

Seven brokerage houses out of 12 which are mixed in their ratings expect the stock to return up to 17 percent while rest of five feels the share price can correct up to 23 percent.

The major reason for the correction is that the stock is highly valued currently and seems to have priced in the strong June quarter earnings and likely growth going ahead.

The stock rallied nearly 30 percent to close the June quarter at Rs 1,847.20 while in the year-to-date, it shot up nearly 39 percent on top of 14 percent upside in 2017.

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Here are 12 brokerage houses with their view, ratings and target prices:

Jefferies: Buy | Target - Raised to Rs 2,140 | Return - 14.13%

The research house has upgraded the stock to Buy from Hold with increased target price at Rs 2,140 from Rs 1,600 earlier, citing best growth outlook amongst Tier-1 IT companies.

Valuation premium to peers is justified by better growth visibility and TCS is the only Tier-1 IT company in coverage with double-digit growth outlook for FY19-21, it said.

Macquarie: Outperform | Target - Rs 2,015 | Return - 7.46%

Macquarie has upgraded the stock to Outperform from Neutral with a target price at Rs 2015 per share.

BFSI pain point is getting addressed and outlook improved significantly for US BFSI, it said, adding it raised FY19-21E EPS by around 10-14 percent.

Kotak Institutional Equities: Reduce | Target - Raised to Rs 1,790 | Return - (4.54%)

Kotak has maintained its Reduce call on the stock but increased its target price to Rs 1,790 (from Rs 1,650 earlier) as it struggled to justify punchy valuations of 21x FY20 earnings.

The target price raised following increased in EPS estimates by 3-5 percent for FY19-21 on revision to INR/USD forecast.

It expects 10 percent constant currency (CC) revenue growth in FY19 powered by large deals in second half of FY18. "Company may sign similar quantum of deals over the coming quarters. We see FY19 margin at 25.9 percent; it would reduce to 25.5 percent by FY21."

Axis Capital: Buy | Target - Rs 2,060 | Return - 9.86%

June quarter set the tone for strong double digit organic growth in FY19 and the company is on course to outpace its peers including global.

It would be the only player to deliver double-digit organic growth. "We expect strong deal wins in BFS/NA to drive double-digit growth in FY19. Margin headwinds have been largely offset in Q1."

Stronger revenue growth, better revenue-mix & rupee depreciation will aid margin.

Nomura: Reduce | Target - Rs 1,440 | Return - (23.20%)

The optimism is largely reflected in the stock price and hence the stock looks expensive at 23x FY20e EPS.

Q1 results were ahead of expectations on revenue/margins and commentary suggests better growth outlook versus peers.

JPMorgan: Neutral | Target - Rs 1,840 | Return - (1.87%)

Now it looks real possibility of hitting double-digit constant revenue growth in FY19 and stocks do not factor in through-the-cycle and sustainable valuations.

Required long-term EPS growth to sustain current valuations appears high and at current market capitalisation, company must sustain 11-12 percent EPS growth over the next 15 years.

CLSA: Buy | Target - Raised to Rs 2,200 | Return - 17.33%

Q1 print beat revenue sharply thanks to secular growth across all geographies. Revenue growth recovery picked up further thanks to US BFS business.

Forex tailwinds and rising segmental margins should drive margin to 27 percent over FY19-20. Deal wins and digital share gains underpinned growth recovery expectation to more than 10 percent in constant currency YoY.

Credit Suisse: Neutral | Target - Raised to Rs 1,625 | Return - (13.34%)

Strong Q1 placed it well for double-digit revenue growth in FY19. New large deals contributed & could ramp up further in Q2. FY20e P/E multiple at 22x is very high.

UBS: Neutral | Target - Rs 2,000 | Return - 6.66%

BFSI pickup powered a strong start to 2018-19. UBS maintained aspirations to achieve 26-28 percent constant currency margins.

Management remained upbeat on demand and called out a turnaround in BFS. UBS expects positive reaction to strong Q1 numbers and positive commentary.

Citi: Sell | Target - Rs 1,645 | Return - (12.27%)

Growth in constant currency terms of 4 percent QoQ was strong. Headcount addition trends are still muted (around 4 percent YoY).

TCS continues to deliver better than peers.

Motilal Oswal: Neutral | Target - Rs 1,950 | Return - 4%

Motilal Oswal expects TCS to clock 10/19 percent revenue/earnings CAGR over FY18-20. The EPS CAGR in part is led by normalisation that follows flattish EPS in FY18.

Recent deal wins and a recovery in both BFS and Retail lend confidence in an acceleration of growth in FY19 to 10 percent in constant currency terms, from 6.6 percent in FY18.

However, the research house is not building a continual of this acceleration into FY20, and thus maintained Neutral stance on the stock at 20x FY20E earnings.

Prabhudas Lilladher: Accumulate | Target - Rs 2,080 | Return - 11%

Prabhudas reset USD/INR assumptions lower to which leads to drive margin and EPS upgrades (USD versus INR estimates at 67/67 for FY19/FY20E versus 65/65 earlier). "We model EBIT margins at 25.7/25.1 percent for FY19/FY20E (versus 24.8 percent in FY18). Our EPS estimates are upgrades by 4/4 percent for FY19/FY20E to Rs 80/85/share."

TCS stock trades at 23x one year forward EPS (versus 19.3x traded four months ago). TCS trades at 22.2x FY20E EPS. TCS now trades at 5 percent premium to Accenture.

Prabhudas upgraded target price by 4 percent to Rs 2080/share (24x FY20E EPS) led by EPS upgrade.

Disclaimer: The views and investment tips expressed by brokerage houses on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Jul 11, 2018 09:51 am
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