TCS Stock Hits All-Time High As Analysts Laud Q2 Performance

Shares of Tata Consultancy Services Ltd. rose to an all-time high after India’s biggest software services provider’s quarterly profit rose and margin expanded, indicating signs of recovery from the disruptions stemming from the Covid-19 crisis. Analysts, too, remained bullish.

The company’s net profit rose 6.6% sequentially to Rs 7,475 crore in the July-September period, according to an exchange filing. While its margin expanded to 26.2% from 23.6% in the preceding three months, revenue growth in dollar terms was highest for the company in 24 quarters.

TCS’ board also approved a proposal to buy back up to Rs 16,000 crore worth of shares to reward stakeholders. It will repurchase 5.33 crore shares or 1.42% of the total paid-up equity, at Rs 3,000 apiece. Besides, the board approved a second interim dividend of Rs 12 per share.

While most analysts raised their earnings estimates of TCS for the next two financial years, they are concerned about its expensive valuations.

Of the 48 analysts tracking the stock, 20 have a ‘buy’ rating, 19 recommend a ‘hold’ and rest suggests a ‘sell’. The average of Bloomberg consensus 12-month price targets implies a downside of 5.9%.

Shares of TCS gained as much as 5.2% to hit an all-time high of Rs 2,877 apiece on Thursday. The stock is up for the ninth straight day, its longest winning streak on record.

Here’s what the brokerages have to say:

Macquaire

• Hikes the FY21-23 estimated EPS by 3.5-8.4% for TCS, and consequently raised the target price to Rs 3,030 apiece, which values TCS at 27 times September FY22 earnings
• TCS’ commentary on demand underscores the brokerage’s thesis of strong digital transformation demand
• Margin improvement will continue, driven by growth, changing hiring model in medium term and savings in selling, general and administrative expenses

Citi

• Maintains a ‘sell’ rating with a target price of Rs 2,350 apiece because of the sector’s high valuations
• Operating leverage and cost controls led to a big margin beat
• Medium-term commentary on IT spends was positive though near-term comments were a bit muted
• Raises FY22 and FY23 estimated estimates by 1% and 3%; raises earnings multiples to 25 times from 24 times earlier
• The sector’s high valuations — about 30 times estimated FY22 PE
• Sector view remains positive; prefers Tech Mahindra, Infosys and HCL Technologies

Emkay Global

• Assumes coverage on TCS with a ‘hold’ rating and a target price of Rs 2,780 apiece
• That values TCS at 26 times September FY22 earnings
• TCS remains the best execution story but valuations are rich
• Revenue growth was broad-based and led by BFSI (6.2% quarter-on-quarter in constant currency), retail and consumer packaged goods (8.8% quarter-on-quarter in constant currency) and life sciences and healthcare (6.9% quarter-on-quarter in constant currency)
• All markets posted sequential growth
• Management said second quarter played out slightly better than expectations and believes that demand recovery is sustainable

Phillip Capital

• Maintains ‘buy’; raises price target to Rs 3,015 from Rs 2,840 apiece
• TCS is one company which can emerge stronger out of this crisis, bouncing back strongly in FY22
• Valuations at 24 times FY23 price to earnings might appear expensive relatively
• Expects TCS to continue to command valuation premium to its peers on the back of its strong diversified profile, superior return profile (return on equity of 38%), management stability and market leadership position
• Continues to value TCS at 26 times FY23 PE
• Changes FY21/22/23 estimates by -7%, +3%, +6% on results beat in the quarter, exceptional provision and higher margin expectations
• Remains cautiously optimistic on the sector with the U.S. presidential elections approaching and valuations bordering on expensive

CLSA

• Maintains ‘outperform’ rating; raises price target to Rs 2,750 from Rs 2,610 apiece
• Strong beat on both revenue and margins in second quarter
• Order book is optically strong
• Long-term extrapolation of Q2FY21 will be incorrect
• Valuations at nearly 60% premium to its five-year median appear rich
• Size and premium of buyback provides little incentive to institutional and retail shareholders and may limit incremental upside in the near-term
• Raises FY22/23 earnings per share estimates by 3%