Moneycontrol
Jan 12, 2018 11:07 AM IST | Source: Moneycontrol.com

TCS falls on profit booking; UBS, Deutsche see stock at Rs 3,000 in next 1 year post Q3 nos

While maintaining Buy rating on the stock with a target price at Rs 3,000 per share, UBS said numbers were in-line, with retail segment picking up but banking declining.

 
 
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Tata Consultancy Services shares fell as much as 1.6 percent in morning Friday despite bagging of USD 2 billion order in US. It was in addition to 0.7 percent loss in previous session following nearly 4 percent rally on Wednesday.

The further correction was largely because of profit booking as third quarter numbers came in line following which analysts retained their ratings.

At 09:42 hours IST, the stock price was quoting at Rs 2,760.20, down Rs 28.20, or 1.01 percent on the BSE.

In a seasonally weak quarter, the IT major has reported sequential profit growth of 1.3 percent in Q3FY18 while dollar revenue grew by 1 percent to USD 4,787 million compared to September quarter, driven by strong deal wins and digital demand.

Constant currency revenue growth for the quarter came in at 1.3 percent, which was lower than 1.7 percent growth in previous quarter and 2 percent in year-ago. It has registered strongest sequential volume growth of 1.6 percent for December quarter in three years.

Revenue growth was driven by manufacturing, retail & consumer business, CMT and others; but impacted by lower banking, financial services and insurance business.

“We wrapped up 2017 with a strong performance in the December quarter, marked by the signing of industry-defining deals, robust client metrics and broad-based demand across industrial verticals,” Rajesh Gopinathan, CEO, and MD at TCS said in the press release.

Meanwhile, TCS has bagged the largest ever deal today as it has entered into an agreement with Transamerica (a leading provider of life insurance, retirement and investment solutions) to enable transformation of administration of its US insurance and annuity business lines.

"The multi-year agreement is worth more than USD 2 billion in revenues, and is expected to be completed by the second quarter of 2018," TCS said.

Brokerages' take on earnings

Edelweiss: Rating - Hold | Target - Rs 2,844

Tata Consultancy Services’ Q3FY18 revenue, at USD 4,787 million (up 1 percent QoQ) and EBIT margin at 25.2 percent were broadly in line with Street’s estimate.

Key highlights: 1) BFSI declined by 1.5 percent QoQ on softness in North America; 2) Retail turned-around with growth of 6.4 percent QoQ; 3) digital revenues grew 13.9 percent QoQ/39.6 percent YoY, representing 22.1 percent of total revenues; and 4) traditional retailers are leveraging technologies to enhance value proposition to customers, implying an optimistic outlook.

The research house believes with digital at 22.1 percent (growth of 33.9 percent YoY YTD), both US and Europe showing strong traction and current margins (25.2 percent) below the aspired 26-28 percent range indicate that things can only improve from here.

Hence, it raised target multiple to 18x from 16x earlier, and roll forward to FY20.

Deutsche Bank: Rating - Buy | Target - Rs 3,000

As December quarter results were in-line, which means the recovery is on track, Deutsche Bank said while maintaining Buy call on the stock with a target price of Rs 3,000 per share.

Ex-BFSI (banking, financial services and insurance), company has reported a strong revenue growth of 2.4 percent QoQ while the robust growth in digital revenue and turnaround seen in retail & CPG are key positives, the research house said.

However, the decline in Asia Pacific revenue and muted revenue growth in Americas are key negatives, it added.

Management expects BFSI to improve in 2018.

Kotak Securities: Rating - Reduce | Target - Rs 2,700

Kotak Securities has maintained its Reduce rating on the stock, but upped target price to Rs 2,700 due to rollover and marginal change in multiple.

Numbers were in-line on growth & profitability. FY19 setup looks promising and current valuations bake in cyclical uptick, it said.

The research house made a few changes to EPS resulting in 1 percent cut.

Credit Suisse: Rating - Neutral | Target - Rs 2,350

Credit Suisse also said Q3 numbers were in-line, with retail segment bouncing back but not financial services.

It feels the management sounds comfortable with the outlook barring financial services but the growth momentum continues to be soft in the US.

TCS reported 10 basis points expansion in margin at 25.2 percent for Q3. Margin may fall short of targeted range of 26-28 percent on currency woes in FY18, Credit Suisse feels.

UBS: Rating - Buy | Target - Rs 3,000

While maintaining Buy rating on the stock with a target price at Rs 3,000 per share, UBS said numbers were in-line, with retail segment picking up but banking declining.

It expects muted reaction to results and concerned about decline in banking segment.

Sharp decline in IT services spending may result in downward revisions to earnings estimates, it feels.

Management expects retail to return to double digit growth and is confident of achieving 26-28 percent constant currency margins.

JP Morgan: Rating - Neutral | Target - Rs 2,700

While retaining neutral rating with a target price at Rs 2,700 per share, JPMorgan said Q3 results were in-line with estimates and weakness in BFSI dragged revenue growth.

Current valuation appears punchy, factoring in hopes of a demand improvement.

HDFC Securities: Rating - Neutral | Target - Rs 2,705

After TCS posted in-line quarter, HDFC Securities believes that growth will not accelerate meaningfully based on (1) BFSI challenges in North America (linked to large US BFS accounts), (2) Pricing pressure in traditional business, and (3) Volatility in regional market segment.

Also, elevated operating risk arising out of investments in large deals and shift in geo-mix will keep margins below the 26-28 percent aspirational band. EPS estimates are changed slightly (1.3/1.7 percent for FY19/20E) and stock is fairly valued at 19.1/17.5x FY19/20.
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