Analysts Maintain Stance On TCS But Cautious On Outlook

Analysts turned cautious on Tata Consultancy Services Ltd. after the nation’s largest software services provider said it expected revenue to contract in the ongoing financial year amid disruptions caused by the Covid-19 pandemic.

“The pandemic completely reversed the positive momentum that we had started seeing in some of our biggest verticals in the first half of the quarter,” Rajesh Gopinathan, chief executive officer at TCS, said in a statement. “We expect a return to normalcy in third quarter of FY21,” he said, adding that fourth quarter will be similar to the recently-concluded one. The impact of Covid-19 on TCS will be similar to the global financial crisis of 2008, he said.

Net profit of TCS fell 0.8 percent sequentially to Rs 8,049 crore in the quarter ended March, according to an exchange filing. Dollar revenue fell 2.5 percent over the preceding quarter to $5,444 million.

Here’s what the brokerages have to say:

Investec

• Maintains ‘hold’ with a target price of Rs 1,822 apiece.
• Drop in revenue largely led by supply-side disruptions and some impact from demand side.
• Strong order book marred by Covid-19; expects sharp revenue declines in the first quarter of the financial year ending March 2021.
• Valuations remain stretched despite uncertainties.

JPMorgan

• Maintains ‘overweight’ and keeps target price unchanged at Rs 2,300 apiece.
• Expects TCS to weather downturn better than peers and gain market share.
• Fourth quarter revenue miss owing to Covid-19-driven supply disruptions.
• Sees demand destruction across all geographies.
• Expects company to gain from vendor consolidation.

CLSA

• Maintains ‘buy’ but cuts target price to Rs 2,115 a share from Rs 2,550.
• Revenue growth at 10-year low and a weak outlook for FY21.
• Margin resilient in fourth quarter but it may come under pressure in FY21.
• Best positioned to exploit digital adoption at better margins.

Emkay Research

• Maintains ‘sell’ and cuts target price to Rs 1,520 apiece from Rs 1,560.
• EBIT margins were better supported by a significant reduction in other costs.
• Strong order booking aided by large deal bookings.
• Valuations remain punchy against backdrop of sector-wide challenges.

UBS

• Maintains ‘neutral’ with a target price of Rs 1,855 apiece.
• TCS expects peak impact comparable to global financial crisis; anticipates sharp recovery.
• Revenue and margins to return to normalcy levels back in third quarter of the ongoing financial year.
• Outlook is largely in line with estimates; stock should be range-bound.