Q1 Results: Here’s What Analysts Made Of TCS’ First Quarter Performance

Tata Consultancy Services Ltd.’s operating margin narrowed to its lowest in eight quarters in the three months ended June and profit remained flat as wage costs rose.

Several brokerages, including Edelweiss Research, had expected the rupee appreciation and higher employee costs to drag the operating margin of India’s largest software services provider. Still, they maintained their stance on the stock on account of large deal flows and robust digital business.

A few brokerages, however, cut their earnings per share estimate as margin missed estimates and revenue growth remained weak. They also expect some near-term pressures for the company.

Here’s what they have to say about TCS’ June-quarter performance:

Citi

• Maintains ‘Sell’ but cuts target price to Rs 1,970.
• Relatively sluggish performance for a seasonally strong quarter.
• Expects premium multiples to come under pressure with the slowing growth concerns in the long term.
• TCS’ cost optimisation efforts helped deliver good margin performance.
• Estimates earnings to see an annual growth rate of about 5 percent through FY22.

Jefferies

• Maintains ‘Buy’ but cuts target point by Rs 20 to Rs 2,380.
• Deal pipeline remains strong, optimistic on double-digit growth for FY20.
• Cuts earnings per share estimate to reflect weaker revenue growth and stronger rupee.
• TCS remains best placed among top tier IT services providers to deliver strong revenue growth and margin.

Edelweiss

• Maintains ‘Hold’ with a target price of Rs 2,137.
• Margin decline was driven by higher sub-contracting and wage hike effect.
• TCS will have more headroom to expand margin going forward as local talent gets deployed, sub-contracting costs reduce and more work moves offshore.
• Strong deal wins and hefty digital revenue growth rate infuse confidence in higher revenue growth.

Morgan Stanley

• Maintains ‘Equal Weight’ with a target price at Rs 1,980.
• Performance in the second quarter will be key to achieving the management’s goal of sustaining double-digit constant currency growth in FY20.
• Sees limited upside risks to growth estimates.
• Expects steady recovery in revenue growth and margins over the next three years.
• Expects margins to come down in FY20 due to higher-than-usual wage cost pressures in the U.S. and lack of currency tailwinds.

CLSA

• Maintains ‘Buy’ but cuts target price to Rs 2,570 from Rs 2,650.
• Margin miss estimates, mainly due to supply pressures.
• Rising relevance — large deal wins, digital share gains and client mining.
• Cuts earnings per share estimates by 3 percent to factor in revenue and margin miss.

UBS

• Maintains ‘Neutral’ with a target price of Rs 2,400.
• Revenue miss likely to raise demand concerns.
• TCS continues to see stress in capital markets and European banking customers.
• Expects some near-term pullback.

Bank of America Merrill Lynch

• Maintains ‘Neutral’ and hikes target price to Rs 2,130 from Rs 2,040.
• U.S. decelerates; steady margin performance.
• Lower FY20/21 earnings per share estimates by 3-5 percent.
• Stronger margin to peers is likely to help retain premium valuations.

HSBC

• Maintains ‘Hold’ with a target price of Rs 1,900.
• Growth slowed down despite strong deals due to a cyclical slowdown in demand.
• Long-term outlook remains positive, but near-term slowdown in demand to impact growth.
• Significant macro slowdown and rupee appreciation remain key risks.