TCS pleases Street with record deal wins, analysts see double-digit growth: Should you buy?

Nomura retained its "reduce" rating on TCS with a price target of Rs 3,250, which is among the lowest on the street for TCS.

Tata Consultancy Services (TCS) shares rose on April 15 as the company pleased market experts with the profit in the quarter ended March 2024 beating what the Street projected.

The company reported its highest EBIT margin in three years along with a record-breaking $13.2 billion in deal wins, which analysts believe provide near-term revenue visibility.

Going forward, the company will benefit from both short-term cost-saving initiatives and medium-term digital transformation contracts. and will likely report double-digit earnings growth in FY25, they said.

JPMorgan has called TCS a "cross-cycle champion" that will benefit from cost takeout deals in the short term and a discretionary digital transformation deals in the medium term. The international brokerage upgraded the IT major's stock to 'overweight' and also raised its price target to Rs 4,500 from Rs 4,000 earlier.

Also Read | TCS Q4 results, record order book gives revenue visibility for near term: Experts

With record deal wins, analysts at JPMorgan expect TCS to outpace all large IT services peers in FY25. TCS' generative AI pipeline of $900 million, double of the previous period, also appears promising, it noted.

Conversion of deal wins into revenue is a matter of time

According to Goldman Sachs, TCS' quarterly performance is increasing the probability of the company reporting double-digit earnings growth in FY25. The brokerage retained its 'buy' rating on TCS with a price target of Rs 4,350, and maintained its 8 percent revenue growth projection for the company in FY25, compared to 3.4 percent that it reported in the previous financial year.

Despite all the positives in the March quarter, the TCS management appeared to be holding back on calling out growth revival, according to UBS. The brokerage added that the management appears to be cautious of potential risk of deal deferments, slippages, given the uncertain macros.

"Nonetheless, the conversion of deal wins into revenue is a matter of time," UBS said, as it put a 'buy' rating on the counter with a target price of Rs 4,700 per share. It expects TCS to lead its peers in revenue growth along with better margins in FY25.

TCS remains HSBC's preferred pick in the IT services sector. While TCS's management refrained from committing to a recovery pace for H1FY25, TCS maintains its reputation for sector-leading earnings resilience, the brokerage said as it put a 'buy' call on the stock with a target price of Rs 4,540.

Limited revenue growth could weigh on valuation

Morgan Stanley in its note said that TCS's Q4 results and management commentary presents a mixed picture, with a margin surprise prompting a 2 percent increase in EPS estimates. However, concerns arise from limited visibility into near-term revenue growth trends, which could potentially weigh on the stock's valuation.

Also Read | TCS Q4 results: Net profit rises 9% to Rs 12,434 cr, firm declares final dividend of Rs 28 per share

Although the IT firm's international revenue growth was subdued in Q4, the Indian business segment contributed to its overall growth. The TCS management anticipates revenue growth in the current fiscal to surpass that of FY24. Yet, the volatile discretionary spending climate introduces unpredictability, said Morgan Stanley.

Strong exit margins bolster optimism for a favorable outlook in FY25, the brokerage said as it put an 'Outperform' rating on the stock with a target of Rs 4,350 per share.

TCS well-positioned for high growth

According to analysts at Nuvama, TCS is well positioned to benefit from growing demand for offshore IT services. Given its greater experience than peers in implementing large, complex, and mission-critical projects, the company is a serious contender for large deals. Moreover, it has a global presence, deep domain expertise in various industries and offerings in digital transformation services, cloud, cognitive business operations, etc, they said.

"A portfolio of turnkey services offerings, traction in emerging markets, ability to roll up, improving sales and marketing prowess, and willingness to take multiple big bets (different go-to-market models) are among the key drivers that should help TCS sustain its hi-growth trajectory in the long run," said Nuvama as it maintained a 'buy' rating on the stock with a target price of Rs 4,560 per share.

Nirmal Bang remained ‘underweight’ on the IT sector and maintained a ‘sell’ call on TCS due to its rich valuation. The brokerage believes that TCS is in a ‘slower for longer’ kind of a scenario.

"While we believe TCS can deliver steady growth, the best margins, strong ROICs and cash flows in the Tier-1 space, US$ growth beyond FY26 will settle at 5-7 percent CAGR," it said.

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