Q3 Results: Brokerages Cut Price Target For TCS As Margin Misses Estimates

Brokerages cut target price for India’s largest software services provider after its margin for the three months ended December fell the most in six quarters.

Tata Consultancy Services Ltd.’s operating margin fell 90 basis points over the previous quarter to 25.6 percent in the October-December period, its exchange filing showed. That’s lower than estimates and also below its guided range of 26-28 percent.

The company, however, said its onsite hiring to meet the demand for $5.9-billion worth of deals struck during the third quarter weighed on the margin. Still, analysts are upbeat about the company’s growth prospects as they maintained their stance on the stock. (More details on earnings here)

Shares of TCS opened marginally lower on Friday and are trading as much as 1.8 percent down at Rs 1,854 apiece.

Here’s what the brokerages have say about TCS:

Morgan Stanley

• Maintains ‘Overweight’ and set target price at Rs 2,260 apiece.
• The third quarter saw a small beat on revenue but was offset by miss on margin.
• Sees downside risks to margin expectations given dismal performance in the quarter.
• Margin levers will take time and could face headwinds in the interim.

Macquarie

• Maintains ‘Outperform’; cuts target price to Rs 2,291 from Rs 2,345.
• Results a mixed bag, with revenue meeting estimates but missing margin by 100 basis points.
• Lowers FY19-21 EBIT margin estimates by 30-50 basis points.
• Expects double-digit growth in FY20 on strong growth in order book and positive commentary.

CLSA

• Maintains ‘Buy’; cuts target price to Rs 2,460 from Rs 2,500.
• TCS’ margin slipped 90 basis points sequentially due to a talent crunch in the U.S. due to strong demand and scarce visa availability.
• Cuts margin estimates by 60-70 basis points to reflect growth-margin trade-off.
• Expects TCS to fully exploit strong demand and gain share from its unique position.

Investec

• Maintains ‘Hold’; cuts target to Rs 1,930 from Rs 2,290.
• A weak quarter across the board.
• Lowers EPS estimates for FY20/21 by 3.5 percent/3.3 percent; key assumption being no deterioration in macros.

Jefferies

• Maintains ‘Buy’; cuts target to Rs 2,230 from Rs 2,300.
• Miss in margin but delivers on growth.
• Deal total contract value surprises positively; commentary remains positive.
• Cuts EPS estimates by 3 percent over FY19-FY21 mainly to reflect lower margin.