TCS has no room for error; maintain neutral: Espirito

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26 Aug, 2025 12:21

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Espirito Santo has maintained a ‘neutral’ on Tata Consultancy Services (TCS), despite the company’s strong performance. 

In its latest report, Espirito Santo said that though TCS’ margins are currently close to all-time highs, yet they believe that it is driven more by scale benefits, which is significantly larger than peers (30 percent larger than the closest offshore peer).

TCS, India’s number one software exporter, reported a net profit of Rs 5,314 crore for the quarter ended December, up 13 percent sequentially, as the company maintained its robust operating margins. Quarterly revenues at Rs 21,294 crore were marginally lower than analysts estimates, but up 1.5 percent sequentially and 32.5 percent year-on-year.

TCS has consistently met street expectations posting industry-leading growth despite a large base, Espirito Santo said, adding that the tech company can close FY14 with a revenue growth of 16.5 percent Y-o-Y. It estimates TCS’ revenue growth in FY15 to be 18 percent.

However, the brokerage note is quick to add that the stock’s current P/E multiple of 19.9x FY15E does not give it any room for a possible earnings miss. “TCS needs to deliver a 4.5 percent compounded quarterly growth rate (CQGR) over the next four quarters to achieve our 18 percent Y-o-Y growth estimate. We maintain our neutral stance and raise our fair value to Rs 2,500 (from Rs 2175) as we roll over our estimates to FY16,” the note said.

The Espirito Santo note points out how TCS can continue to deliver strong growth on a larger base without higher risks.

* For TCS to continue its revenue run rate it requires large deals. Large deals by their nature require vendors to make large upfront investments. This then will translate into margin declines in quarters where the vendor makes these investments.

*When it comes to the last round of a negotiation (which is largely on price), TCS gets the contract as it can afford to bid aggressively given its scale benefits. TCS billing rates have fallen 6 percent in the last five years compared with a 4 percent fall for Infosys and a 6 percent increase for Wipro. Given that a weaker Rupee will result in higher margins, TCS could pass on the incremental benefits to clients.

*TCS has been talking about building an internal application that brings real time business data to employees, thereby empowering employees, reducing organisational hierarchy over time and increasing productivity. While this effort is in a nascent stage, it highlights how the company plans to manage growth on a larger base.

(Posted by Kankana Roy Choudhury)