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TCS Q3 Results: Brokerages Remain Cautious Over Weakness In Key Verticals

Most analysts remained concerned over weakness in key verticals and lofty valuations at India’s largest software services company.

Signage for Tata Consultancy Services Ltd. is displayed outside the company’s headquarters in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Signage for Tata Consultancy Services Ltd. is displayed outside the company’s headquarters in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Most analysts remained concerned over weakening key verticals and lofty valuations at India's largest software services company even as its third-quarter profit met estimates.

Tata Consultancy Services Ltd.’s operating margin rebounded from a nine-quarter low on the back of a weaker rupee and cost efficiencies.

TCS Q3 Results: Brokerages Remain Cautious Over Weakness In Key Verticals
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Here’s what the brokerages had to say:

Citi

  • Maintaining ‘Sell’ on weak Q3 results; Target Rs 1,975.
  • Banking, financial services and insurance and the U.K. business were particularly sluggish with declines sequentially.
  • Impacted by challenges in BFSI and retail, expectations still remain elevated.

Credit Suisse

  • Raise target to Rs 1,950 from Rs 1,892, Maintain ‘Neutral’ on third successive revenue miss.
  • BFSI and retail-led growth moderation continues; EBIT margin at 25 percent surprised positively.
  • Don’t expect a pick up anytime soon with persistent BFSI headwinds.
  • Valuations remain steep at 24x and are concerning.

Edelweiss

  • Raise target to Rs 2,175 from Rs 2,137, Maintain ‘Hold’.
  • Revenue deceleration in BFSI and North America overshadows margin performance.
  • Operating margin expanded, aided by a lower headcount.
  • Expensive valuation and lack of margin levers keep us wary on the stock.

Goldman Sachs

  • Cut target to Rs 2,063 from Rs 2,076; Maintain ‘Neutral’
  • Expected to face cyclical demand downturn in its key industry verticals over the next few quarters.
  • Stock is currently trading at 23.7x earnings per share estimate for FY21 versus Indian IT sector at 16.5x.
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HSBC

  • Raise target to Rs 1,950 from Rs 1,900, Maintain ‘Hold’ on headwinds and valuations.
  • Soft revenue growth, led by tepid banking business, particularly in the U.S./U.K. large banks.
  • TCS may, at some stage, need to offer higher deal flexibility to revive growth.
  • Management expects the U.K. business to revive in the coming quarters with improving political certainty.

Kotak

  • Maintain ‘Reduce’; Raise target to Rs 2,020 from Rs 1,900 on rollover to 2021 EPS.
  • Moderation in growth and on expected lines for Q3.
  • Weak revenue growth impacted by slowdown in financial services and technology verticals.
  • TCS is an excellent business. However, current valuations are expensive.