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Last Updated : Aug 30, 2018 08:30 AM IST | Source: Moneycontrol.com

TCS jumps 69% from its 52-week low. Is the stock overbought?

TCS showed a strong start in FY19 mainly led by a recovery in BFS and a strong performance by retail segment.

Sunil Shankar Matkar
 
 
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India's largest software services firm Tata Consultancy Services has outperformed by the most in last one year and has also been amongst the top three counters which have helped Nifty50 rally 20 percent.

The stock has rallied 69 percent from its 52-week low, touched in September 2017, driven by factors like consistency in earnings momentum, rising contribution from digital space and strong management outlook.

The entire IT sector had underperformed for a year-and-half before this rally started.

The Nifty IT index itself has surged over 48 percent in last one year against 1 percent gains in the earlier year. Another major reason for the upside is the sharp depreciation in Indian rupee that touched fresh record low of 70.50 to the dollar on Wednesday, falling more than 10 percent from 64 a dollar level traded a year back.

A year back, every IT company was facing challenges due to weakness in major verticals like BFSI (banking, financial, services and insurance) and retail where there was lack of visibility in the industry and continued pressure in the legacy portfolio, Niharika Ojha, IT Analyst, Narnolia Financial Advisors told Moneycontrol.

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However, the management of TCS gradually gained the confidence of investors by boosting performance in the digital business and increasing spending in America in its major verticals during the last three quarters, she said.

On the margin front, TCS has maintained EBIT margin of 25 percent even when the industry was passing through a tough phase.

For TCS, the BFSI segment has shown a turnaround. TCV (total contract value) has increased to USD 4.9 billion which mainly came from BFS (USD 1.6 billion). Even the management capital allocation policy (buyback in July) is acting as the support to the current trend, Niharika feels.

TCS showed a strong start in FY19 mainly led by a recovery in BFS and a strong performance by retail segment.

In Q1FY19, the company posted better-than-expected results on the back of strong growth in digital business. The company reported revenue at Rs 34,270 crore registering QoQ growth of 6.8 percent and YoY growth of 15.8 percent, while bottomline registered 24 percent YoY growth & 6 percent QoQ growth at Rs 7,300 crore.

Revenue from digital engagements contributed 25 percent of the company's revenue. In Q1FY19, the company witnessed 44.8 percent YoY growth in digital business & 4.1 percent growth in BFSI vertical. It has signed the contracts worth of USD 4.9 billion in Q1FY19.

Margin managed to stand at 25 percent mainly resulted from operational efficiency and INR depreciation benefit. BFS segment (31 percent of total revenue) showed a recovery in Q1 with the growth of 8 percent QoQ on account of recovery in North America. TCV is way ahead of the peers like Infosys.

All experts agreed that after a strong start to the year, the performance in quarters ahead is expected to be maintained driven by its BFS segment, strong deal pipeline and digital push.

But they are mixed in their opinion on stock performance going ahead due to the sharp rally seen in last one year.

AK Prabhakar, Head of Research, IDBI Capital Markets & Securities said given the preference for large-caps he expects TCS to continue to do well in the near term.

"TCS has been reporting good results for the last few quarters. The 40 percent plus YoY growth in Digital solutions in the last two quarters and momentum in large deals makes us believe that it would report the best improvement in revenue growth in FY19 amongst IT large-caps. We also like the consistency in payout to shareholders, especially through share buyback," he reasoned.

Astha Jain, Senior Research Analyst, Hem Securities is also positive on the future outlook of the company and suggests one-year price target for the company anywhere between 10 percent and 20 percent above from current level.

She believes that company's deep domain expertise, contextual knowledge and strong solution capabilities built up over the last many years positions company well to cater growth opportunities present in the sector.

But Niharika Ojha said going forward, though she expects strong sales and PAT growth, but due to higher valuation she does not see any significant upside for the stock price. Currently, Narnolia has a Neutral rating on the stock with a target price of Rs 2,100.

Going forward with the recovery in BFS segment, robust deal pipeline and accelerating digital demand, she expects a strong revenue performance in FY19. "Even the management is optimistic of strong visibility in BFS and Retail in the medium term. We expect sales growth of 16.8 percent in FY19 with EBIT margin of 25 percent."

Sanjiv Bhasin, EVP-Markets & Corporate Affairs, India Infoline also feels IT stocks already run its course and he is not gung ho on the sector though the rupee has been depreciating.

TCS can see another 5-7 percent rally from here on and he can be a market performer but not outperformer from now.

To play on the rupee front, he likes to bet on pharma space rather than IT wherein valuations already stretched and overowned by fund houses.
First Published on Aug 30, 2018 08:30 am
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