What Brokerages Make Of TCS Earnings
Why Kotak Securities expects further cuts to TCS’ earnings estimates.
It’s been a mixed first reaction of brokerages to the underwhelming earnings announced by Tata Consultancy Services in Q1FY18.
While the declines in TCS’ revenue and margin have disappointed most analysts, not all have changed their view on the stock.
Also Read: TCS Reports Biggest Quarterly Profit Decline In Two Years
Kotak Securities - Maintain REDUCE
Another quarter of disappointing earnings has prompted brokerage Kotak Securities Ltd. to warn of a cut in Tata Consultancy Services’ earnings estimates. And it’s the margin miss that’s hurt the most. The earnings before interest and tax (EBIT) margin declined 230 basis points sequentially.
Kotak Securities’ report points out that the company may retain its longstanding guidance for a 26-28 percent EBIT margin band but the brokerage expects the margin to “decline in any case in FY2018”.
Regarding the revenue miss, Kotak notes that volume growth was 3.5 percent quarter-on-quarter “implying an adverse pricing mix of 1.5 percent”.
Kotak attributes the company’s sub-par performance in the past few quarters to
- Weak financial services and clients moving more business to India captives
- Lack of participation in early stage digital opportunities
- Vulnerable maintenance-heavy portfolio
IDBI Capital - Currently HOLD
This brokerage found succour in TCS’ digital revenue growth at 7.6 percent quarter-on-quarter.
“As expected, Q1FY18 saw slower growth than Q1 is for TCS. EBIT margin miss is a surprise as TCS has been the best amongst large-caps in margin management,” said the report.
UBS Securities - Currently BUY
Similar to other brokerage reports UBS has highlighted the change in vertical reporting by TCS as a noteworthy feature.
A new vertical labelled Regional Markets includes “volatile, project centric business” the report points out.
It has also pointed out the lack of service line data. “The lowered disclosures (service lines) are also unlikely to soothe investor concerns.”
The report also notes that the company sees a mixed demand environment in the banking and financial services industry vertical, versus an incrementally positive outlook earlier.
B&K Securities - Maintain UNDERPERFORMER
This brokerage has, like others, highlighted TCS’ disappointing operating performance and that the company did not provide service line wise revenue data, as the reorganisation of service lines will be completed in Q2FY18.
Morgan Stanley - UNDERWEIGHT
This brokerage house is underweight on the stock with the target price of Rs 2,100. Analyst at Morgan Stanley believe that going ahead the earnings are likely to decline further as margins are under pressure.
The report points out that revenue growth estimates are at risk, and the company's margin target range of 26-28 percent may be a tall task.
The report also notes that, faster rebound in spending, especially in the BFSI vertical, could be an upside risk to growth.
Credit Suisse - MAINTAIN NEUTRAL
This brokerage house believes that the underperformance in margins is primarily because of exchange rates and the wage increase. The report notes that, the wage increase impacted margins by 150 basis points and currency by 80 basis points.
Analysts at Credit Suisse expect Q2FY18 to be seasonally weak despite some of the large deals that TCS signed. The brokerage house believes with new technologies, automation and optimisation of the delivery processes, the required growth rate may be lower now but lack of a significant growth pick-up can potentially put margins at risk.
The brokerage house maintains the target price of Rs 2,250
CLSA - BUY
CLSA reiterates the target price of Rs 2,850 citing that, the revenues were in-line with the estimates. The brokerage house believes that strong deal wins in North America, Insurance and a solid pipeline suggest FY18 revenue growth can jump by 8.3 percent.
However, this brokerage like Credit Suisse highlighted that, margins slipped primarily due to wage hike but lower realisation may have prevented better margin control.
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