Tata Consultancy Services (TCS) shares slid nearly 3 percent on October 11 following lacklustre September-quarter earnings that revealed a weak operational performance, declining margins, and limited sign of recovery.
At 11.35 AM, TCS shares traded 2.3 percent lower at Rs 4,132. The stock's year-to-date performance reflects a nearly 10 percent gain, lagging behind the Nifty 50’s 15 percent rise.
Geographically, TCS's performance was mostly driven by the India market, surging over 21 percent QoQ, while the UK and Europe posted modest growth of 2.8 percent and 3.6 percent, respectively, led by specific client issues. However, the downturn in North America and Latin America, with declines of 1.7 percent and 3.2 percent QoQ, raises concerns about demand recovery. North America contributes almost 50 percent to the revenue share of TCS in any given quarter.
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Sanjeev Hota, Head of Research at Sharekhan by BNP Paribas, said the IT behemoth reported a weak set of numbers with a miss on both revenues and margins. "Though revenue miss was a tad below our estimates, margins performance surprised us negatively."
Reflecting on the poor performance, brokerage Nuvama trimmed its earnings forecasts for TCS, lowering FY25E and FY26E earnings per share (EPS) estimates by 4.9 percent and 3.9 percent, respectively. The brokerage has also revised the stock's target price to Rs 5,100 from Rs 5,250, indicating a potential downside of 22 percent from its current price.
TCS's Q2 FY25 consolidated net profit declined over 1 percent QoQ to Rs 11,909 crore, falling short of Moneycontrol's estimate of Rs 12,420 crore. Revenue from operations increased by 2.6 percent to Rs 64,259 crore, also below the projected Rs 63,938 crore. The company's operating margin declined to 24.1 percent in the September quarter.
A Moneycontrol poll of 10 brokerages had anticipated a 2.1 percent rise in revenue and a 3.2 percent increase in profit after tax (PAT) for the September quarter.
Over recent quarters, the BSNL deal has been a significant growth driver for TCS. "Its contribution will reduce from Q4 FY25, likely to be mitigated by growth in other verticals in our view," Nuvama noted. Nonetheless, Jefferies pointed out that the ramp-down of the BSNL deal might allow for margin improvements.
Also Read | TCS margins decline amid higher third-party costs as BSNL project peaks
Despite these hurdles, TCS management remains optimistic about FY25, especially within the BFSI vertical, which shows promising signs of recovery. "With the Fed making a rate cut and potentially more to come in November and December, discretionary spending is likely to increase in 2025, making it a better year for TCS and the industry as a whole compared to 2024," Ashutosh Sharma, Head of Forrester Research India told Moneycontrol.
Nirav Karkera, Head of Research at Fisdom said that although the margin miss this quarter was unexpected, the broader positive drivers remain in place. "Generative AI and digital transformation continue to bring healthy projects to TCS," he said.
On a positive note, TCS added 5,726 employees, bringing its total headcount to 612,724, and the board declared an interim dividend of Rs 10 per share during the quarter. The company is committed to investing in talent and infrastructure, having initiated campus hiring for FY26.
Valuation-wise, TCS currently trades at a price-to-earnings ratio of 29.9, 26.9, and 24.4 for FY25E, FY26E, and FY27E, based on consensus earnings estimates.
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