TCS Q2 Results Review: Brokerages Cut Target Price As Margin Hits Nine-Quarter Low

Most analysts cut their target price for Tata Consultancy Services Ltd. after its margin narrowed to the lowest in nine quarters.

The dip in margin is “disappointing”, brokerage Edelweiss Research said, adding the software services provider’s “aspirational margin band is likely out of reach”. According to Investec, margins have probably bottomed out in the near term.

India’s largest information technology company reported a 1.1 percent month-on-month decline in net profit at Rs 8,042 crore in the July-September quarter, according to an exchange filing. Its operating margin narrowed 20 basis points to 24 percent—the lowest in nine quarters.

• Revenue rose 2.1 percent quarter-on-quarter to Rs 38,977 crore.
• Revenue in dollar terms rose 0.6 percent to $5,517 million.
• Operating profit, or EBIT, rose 1.5 percent to Rs 9,361 crore.

Full Results

Here’s what the brokerages had to say:

Edelweiss

• Maintains ‘Hold’ but cuts target price to Rs 2,104 from Rs 2,137 apiece.
• Volatility in banking, financial services and insurance sector, and retail dragged overall growth.
• Dip in margin disappointing; aspirational margin band out of reach.
• Cuts revenue estimates for FY20 and FY21 by 2.3 percent and 2.5 percent, respectively, due to massive cross-currency headwinds.

Investec

• Maintains ‘Sell’ and cuts target price to Rs 1,835 from Rs 1,910 apiece.
• Falls short on revenue and margin.
• Too early to call for an acceleration in revenue growth.
• Margins have possibly bottomed out in the near term.

Phillip Capital

• Maintains ‘Buy’ but cuts target price to Rs 2,200 from Rs 2,300 apiece.
• Disappointing results but deal flow remains strong.
• Major segments of BFSI, retail and manufacturing remained weak.
• Valuations might appear expensive, but TCS is a fundamentally superior stock to own.

UBS

• Maintains ‘Neutral’ with a target price of Rs 2,300 apiece.
• Second-quarter revenue miss adds evidence to demand slowdown.
• Expects negative reaction as second quarter miss is likely to lower earnings expectations.

Axis Capital

• Maintains ‘Reduce’ and cuts target price to Rs 1,940 from Rs 2,060 apiece.
• Weak quarter, no immediate triggers.
• Challenges in key verticals, moderating digital growth, and longer tenured deals.
• Remains watchful on growth momentum over FY19-21 that can weigh on premium valuations.

Emkay

• Maintains ‘Hold’ but cuts target price to Rs 1,980 from Rs 2,050 a share.
• Second-quarter results confirm demand moderation.
• Despite strong order intake, growth in key verticals moderated further due to volatile demand.
• Digital demand may not be completely non-discretionary.