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What should investors do with TCS post Q2 results: buy, sell or hold?

The board members of the company have approved a proposal to buy back up to 5,33,33,333 equity shares of company for an aggregate amount up to Rs 16,000 crore.

October 08, 2020 / 03:39 PM IST

IT services major Tata Consultancy Services (TCS) share price rose 4 percent in early trade on October 8, a day after the company reported its September quarter earnings.

The company reported a profit after tax of Rs 7,475 crore for the quarter ended September 2020, registering a 6.7 percent sequential growth.

Consolidated revenue from operations for the quarter grew by 4.7 percent sequentially to Rs 40,135 crore, while the company registered a 4.8 percent QoQ growth in constant currency and 7.2 percent in dollar revenue for the quarter ended September 2020.

The deal wins for the quarter were strong with total contract value at $8.6 billion against $6.9 billion in Q1FY21.

The board members of the company have approved a proposal to buy back up to 5,33,33,333 equity shares of the company, which is 1.42 percent of the total paid-up equity share capital, at around Rs 3,000 per equity share for an aggregate amount up to Rs 16,000 crore.

Also Read - TCS Q2 beat street estimates; 8 key points of quarterly scorecard

Here are the brokerages' view on the stock post the earnings:

KRChoksey | Rating: Upgrade to accumulate from hold | Target: Revises to Rs 3,170 from Rs 2,510

KRChoksey believes with this quarter’s robust performance, the IT major will continue to gain market share in a technology upcycle, with its broad end-to-end service portfolio, strong deal wins and top-notch execution ensuring minimal deal conversion time frame.

It expects TCS to achieve double-digit CC revenue growth in FY22 and FY23, which along with margin improvement, should drive double-digit earnings growth. High payout ratio is also another factor that will boost return ratios and sustain multiple rerating.

It raises FY22E/FY23E EPS by 7-8% on the back of 3-6% revenue growth upgrades and 30-50bps margin increase and raised target multiple on the stock to 28x from 24x, given better-than-expected revenue visibility.

Sharekhan | Rating: Buy | Target: Rs 3,150

Sharekhan upgraded its earnings estimates for FY2021E/FY2022E/FY2023E, factoring in strong beat in both revenue and operating margin.

It continues to prefer TCS on account of a strong business model, stable management, solid execution and strong free cash flows (FCF) generation.

It believes that the pandemic has become the catalyst with a strong acceleration of tech spending on digital transformation. With an increase in adoption of online solutions across verticals, recovery in BFSI and retail, strong deal wins and anticipation of the start of multi-year technology transformation cycle, Sharekhan expects TCS’ revenue and earnings would clock an 11%/13% CAGR over FY2021-23E.

Dolat Research | Rating: Accumulate | Target: Rs 2,950

Given strong Q2 performance, robust deal signings and confident stance on multi-year transformation, broking house upgraded its top-line estimates by 1.7%/2.4% for FY21/FY22.

The OPM cut for FY21 has been factored in given provisioning of Rs 12 billion towards EPIC case and salary hike impact effective Q3. It has introduced FY23 numbers with 9.6% growth and flat margins YoY over FY22.

In next quarter it expects growth of 3.5% CC QoQ in USD revenues lead by broad-based traction across verticals and the renewed urgency by enterprise toward cloud adoption.

Prabhudas Lilladher | Rating: Buy | Target: Rs 3,200

Prabhudas Lilladher increased its estimates by 5% for FY22/23 which were led by strong revenue & sustainable margin performance & value TCS on 30X (earlier:27X) Sep-22 target multiple to arrive at a changed target price of Rs 3200 (earlier: Rs 2738).

ICICIdirect | Rating: Upgrade from hold to buy  | Target:  Rs 3,300

Going forward, global digital technologies are expected to witness robust growth (~0% CAGR in the next five years) led by robust growth in cloud, customer experience and robust growth in cloud-native technologies.

TCS is expected to be a key beneficiary of this trend leading to double-digit revenue growth over a sustainable period. This, coupled with industry-leading growth & solutions, better capital allocation, stable management and higher revenue growth trajectory than witnessed in the past warrant a multiple re-rating for the company.

CLSA | Rating: Outperform | Target: Raised to Rs 2,750 from Rs 2,610

CLSA has raised FY22/23 EPS estimates by 3% on a strong beat on both revenue growth & margin.

The order book was strong & qualitative commentary was characteristically positive. The longer-term extrapolation of Q2 would be incorrect.

The valuation is at a 60% premium to its five-year median, while its valuation appears rich & buyback price & size could underwhelm investors, reported CNBC-TV18.

Citi | Rating: Sell | Target: Rs 2,350

Citi has raised FY22/23 estimates by 1-3%. The company has reported strong Q2, which was well ahead of Citi consensus.

The operating leverage & cost controls led to a big margin beat. The medium-term commentary on IT spends is positive, while near-term comments were a bit muted.

Macquarie | Rating: Outperform | Target: Raised to Rs 3,030 from Rs 2,487

The broking house raised FY21-23 EPS estimates by 3.5-8.4%. The commentary on demand underscores their thesis of strong digital transformation.

The margin uptick will continue driven by growth, changing hiring model & savings in SG&A.

Jefferies | Rating: Buy | Target: Rs 2,580

The overall earnings were ahead of expectations. The beat on margin was mainly driven by higher than expected revenue growth

The profit beat was driven by both EBIT beat as well as higher other income, reported CNBC-TV18.

Kotak Institutional Equities | Rating: Buy | Target: Rs 2,800

The broking house raised FY21-23 EPS estimates by 4-8%. The market share gains & resilient spending by clients led to all-round growth.

The strong revenue growth os 4.8% QoQ in CC drove sharp margin expansion, reported CNBC-TV18.

At 09:18 hrs Tata Consultancy Services was quoting at Rs 2,846.45, up Rs 110.50, or 4.04 percent on the BSE.

Moneycontrol News
first published: Oct 8, 2020 09:32 am