Tata Consultancy Services Ltd.’s valuations have run so far ahead of its earnings that analysts, for the first time since its 2004 listing, expect investors betting on the stock will be left poorer.
Shares of India’s largest software services provider are expected to fall about 3.9 percent in the next one year, according to ICICI Securities, the most accurate forecaster of the stock price in the last 12 months as per Bloomberg. A consensus of analysts tracked by Bloomberg expects the stock to decline nearly 5 percent this year, which means they expect the shares to drop the most since 2015. About 20 percent of the analysts have a sell rating on the stock, the highest since 2009.
Shares of TCS, the most valuable Indian company after Reliance Industries Ltd., have returned 8.6 percent so far this year. They trade at 22.2 times trailing 12-month earnings, a 17 percent premium over peers like Infosys Ltd., Wipro Ltd., Tech Mahindra Ltd. and HCL Technologies Ltd.
India’s software services providers are transitioning from offshore software services and consulting to digital technologies and services like automation and artificial intelligence as businesses adopt the technology. Yet, the key banking and financial services business has not completely recovered even as information technology spends improve as global growth returns. And the threat of U.S. curbs on visas for engineers sent by offshoring companies remains.
Nomura said in a note that it is cautious on TCS because of the sluggishness in larger segments, margin pressure and expensive valuations. “We prefer companies that have a better skew towards growing segments, are available at reasonable valuations and are more protected against U.S. immigration tightening.”
TCS has already won orders worth about $2.7 billion since January. That includes a $2 billion order from the U.S. insurance group Transamerica, its largest contract so far.
Revenue from the digital services, which contribute 22.1 percent of its turnover, rose 14 percent sequentially in the quarter ended December, according to its stock exchange filings. The company won over 150 deals during the quarter. These included 22 in cloud services, 15 in cybersecurity and ten deals around the deployment of Internet of Things.
The company admitted that its key banking, financial services and insurance vertical is yet to recover. It “continues to be in an area where we are on a wait and watch mode”, Rajesh Gopinathan, managing director and chief executive officer at TCS, said after the December quarter results on Jan. 11. “I think we are a couple of periods away from seeing a meaningful recovery in the BFSI segment.”
Jefferies is concerned about the banking and financial services business as growth remained weak during the quarter. The brokerage, which has a ‘Hold’ rating on the stock, expects the stock to decline 10 percent in the next 12 months. Weaker macros, visa issues and a stronger rupee are other key risks that can limit TCS growth, it said.
JPMorgan, which expects TCS’ market capitalisation to touch $100-billion, says the company will not be able to sustain those levels this year. The company will be able to sustain its valuations if it builds a substantial book of differentiated business and wins an outsized share of deals “industrialization of digital” theme, it said. Yet, the brokerage expects an inflexion point as clients get more comfortable in farming out more extensive and more complex digital programs.