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Last Updated : Jan 20, 2020 11:09 AM IST | Source: Moneycontrol.com

TCS Q3 revenue below expectations; what should investors do with the stock?

While maintaining reduce call on the stock and raising target to Rs 2,020 (from Rs 1,900), Kotak Institutional Equities cut its revenue growth forecast marginally, but raised EBIT margin forecast by 20-30 bps.

 
 
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Tata Consultancy Services, the country's largest IT company, reported a constant currency revenue growth of 6.8 percent YoY for October-December quarter, missing analyst expectations and coming in lower than the previous one.

The constant currency revenue growth in September quarter 2019 was 8.4 percent and 12.1 percent in December quarter 2018, while its peer Infosys had reported 9.5 percent YoY growth in CC revenue. The sequential CC revenue growth was 0.3 percent, which was far lower than the poll of analysts conducted by CNBC-TV18 which pegged at 1 percent.

The stock was quoting at Rs 2,185.45, down Rs 32.60, or 1.47 percent, on the BSE at 1009 hours IST, but in last one year it rallied more than 15 percent.

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Its dollar revenue grew by 1.25 percent sequentially to $5,586 million and rupee revenue increased 2.25 percent QoQ to Rs 39,854 crore for the quarter ended December 2019, with deal wins for the quarter at $6 billion and $18 billion for nine months ended December 2019.

Most brokerages are either bearish or neutral on the stock due to high valuations.

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While maintaining reduce call on the stock and raising target to Rs 2,020 (from Rs 1,900), Kotak Institutional Equities cut its revenue growth forecast marginally, but raised EBIT margin forecast by 20-30 bps.

"The company will continue to gain market share. Valuation is expensive with the stock trading at peak multiple. But at the right valuation, it is a must have in the portfolio," the brokerage said.

Citi is also bearish on the stock as it has a sell call with a target at Rs 1,975. "BFSI & UK were particularly sluggish with declines QoQ, but the good cost optimisation resulted in margin improvement of 100 bps QoQ."

TCS will be impacted by challenges in BFS/Retail, while expectations remained elevated, said the brokerage.

At operating level, earnings before interest and tax (EBIT) grew by 6.5 percent sequentially and margin expanded by 100bps QoQ to 25 percent due to rupee depreciation and efficiencies.

BFSI (which contributed 30 percent to total revenue) and retail (15 percent to revenue) growth was muted at 5.3 percent and 5.10 percent YoY. Company expects BFSI to remain soft for the next few quarters.

While having a hold rating with a target of Rs 1,950, HSBC said the company continued to report soft revenue growth, led by tepid banking business, but margins remained healthy.

The global brokerage believes company needs to offer higher deal flexibility to revive growth. "Premium valuation underpinned our hold rating."

Credit Suisse has a neutral call on the stock with a target at Rs 1,950 as it was a third successive revenue miss from the company as BFSI & Retail-led growth moderation continued.

"Valuations are steep at current levels. We tweak our EPS estimate by 1 percent. Company is a high-quality franchise but not immune to uncertain environment," said the brokerage.

Morgan Stanley believes the share price will fall over the next 15 days as valuations are expensive at 22x Dec-21e EPS. "We see P/E multiples coming under pressure as growth slows."

The brokerage feels Q3 revenue growth was lower-than-expected on softness in BFSI & retail segments. "We have equal-weight call on the stock, but raised target to Rs 2,000 from Rs 1,980."

Jefferies is the only brokerage having a bullish stance on the stock and also raised price target Rs 2,500 from Rs 2,300 as revenue was a miss and the guidance for Q4 was soft, but margin surprised positively.

"We tweak our FY20-22 estimates mainly to reflect better margin and expect company to outperform top tier peers on both growth & margins," the brokerage said.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jan 20, 2020 11:09 am
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