Most analysts expect Tata Consultancy Services Ltd. to continue benefitting from mega deals and adoption of digital services as they raised price targets and earnings estimates for the nation’s largest software services exporter despite its premium valuations.
The optimism also stems from an improvement in the company’s margin during the quarter ended December despite wage hikes and its guidance for double-digit revenue growth in the next financial year.
TCS reported a 4.7% quarter-on-quarter rise in revenue at Rs 42,015 crore in the October-December period. Its profit rose 3.2% to Rs 8,701 crore. The company’s margin expanded 40 basis points sequentially to 26.6%. That, according to its Chief Financial Officer V Ramakrishnan, was a result of better utilisation and efficiency.
The company also won total deals worth $6.8 billion during the reported quarter.
The IT sector, analysts said, has entered into a technology upcycle, and TCS will benefit from the recent wave of business outsourcing.
Of the 47 analysts tracking TCS, 26 have a ‘buy’ rating, 13 suggest a ‘hold’ and the remaining eight recommend a ‘sell’.
Here’s what the analysts have to say about TCS’ third-quarter results...
Goldman Sachs
Maintains ‘buy’ rating; raises price target to Rs 3,626 apiece from Rs 3,394.
EBIT margin was a big positive surprise despite wage hikes
Will be one of the key beneficiaries of the current wave of IT outsourcing and cloud migration
Bullish on the scale of operations, wide sate of capabilities/client base and a large pool of re-skilled employees trained on various cloud platforms
Raises FY21-23E EPS estimates by up to 4%
Jefferies
Maintains ‘buy’ rating; hikes price target to Rs 3,720 apiece from Rs 3,520
Margin improvement despite wage hike and hiring was the key surprise
Management comments on growth outlook were encouraging
Expects a strong close to FY21 with revenues from Postbank and Pramerica deals expected in Q4
Raises revenue estimates to factor in the Q3 beat
Raises margin assumptions by 30-70 basis points and consequently raises FY21-23 EPS estimates by about 3%
Expects 10% CAGR in revenue and 13% EPS CAGR over FY21-23
Despite trading at 52% premium to five-year average valuations, improved growth visibility can drive further re-rating
HSBC
Maintains ‘hold’ rating; raises price target to Rs 3,200 apiece from Rs 3,050
Outlook remains promising as company affirms double-digit growth in FY22
Raises FY22 growth estimates to 14% from 12% after strong Q3
Pandemic-led needs have resulted in an improved outlook for Indian IT over next three-four years
Continues to expect mega transformational deals as clients transfer end-to-end operations to IT companies.
Prefers to remain on the sidelines considering limited upside potential for revenues, margins and valuations
Estimates 100-basis-point decline in FY22 margin, led by normalisation of travel, visas and other costs
Investec
Maintains ‘sell’ rating but raises price target to Rs 2,870 apiece from Rs 2,440
Beat driven by offshore shift, better utilisation and currency benefits
Question is sustainability of such high growth rates
Current stock price impounds a 12% revenue growth for nine years with stable margin
Near term is strong and stock can remain elevated, but risks remain
Raises profit after tax estimates for FY21, FY22 and FY23 by 4%, 12% and 5.8%, respectively
Motilal Oswal
Maintains ‘neutral’ rating; raises price target to Rs 3,175 apiece from Rs 3,005
Blockbuster performance in a seasonally weak quarter
Rightly positioned to leverage expected industry growth given size, capabilities and portfolio stretch
Has consistently maintained its market leadership and shown best-in-class execution
Raises EPS estimates for FY21, FY22, FY23 by 3%, 4% and 6%, respectively on account of Q3 beat
Positive on the company but remains neutral due to rich valuations
Emkay
Maintains ‘hold’ rating; hikes price target to Rs 3,150 apiece from Rs 3,000
Likes broad-based revenue growth performance, margin expansion
Raises FY21, FY22 and FY23 EPS estimates by 2.8%, 4% and 4.6% factoring in Q3 beat
Well poised to benefit from acceleration in cloud adoption and digital transformation opportunities, considering its end-to-end capabilities
Valuations are rich
Ambit Capital
Maintains ‘sell’ rating but hikes price target to Rs 2,615 apiece from Rs 2,400
Strong performance, though priced in
Sees cyclical recovery in FY22, with a return to trend growth post that
Digital growth might not be all additive as legacy drags
Expects constant currency revenue growth of 10.8% and 7.4%, respectively, in FY22 and FY23
Sees U.S. dollar revenue, EPS CAGR of 6.6% and 8.7%, respectively, from 5.6% and 7.3% earlier over FY20-23
Finds the stock expensive at current valuations
Credit Suisse
Maintains ‘neutral’ rating with a price target of Rs 2,900 apiece
Strong beat on revenue and operating margin
Strong results places TCS well on the path of achieving double-digit constant currency year-on-year growth in FY22
Headcount grew, while LTM attrition was at an all-time low
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