ECONOMY

Brokerages Cautious On TCS Stock After Q1 Revenue Miss

Most analysts see Tata Consultancy Services Ltd.’s revenue and margin falling short of estimates in the quarter ended June to weigh on its stock performance even as the nation’s largest technology company continues to bag new deals helped by client spending on digital services during the pandemic.

The IT company’s revenue rose 3.9% over the preceding quarter to Rs 45,411 crore in the April-June 2021 period. Its dollar revenue was up 2.7% sequentially (21.6% YoY) at $6,154 million.

Rajesh Gopinathan, managing director and chief executive officer, acknowledged the viciousness of the second Covid-19 wave in India, saying TCS lost Rs 350 crore in revenue due to its impact during the quarter. The company, however, has seen some stabilisation and recovery by June-end. “If Covid situation continues to improve in India, have no doubt we’ll bounce back in Q2,” he has said.

TCS’ margin contracted sequentially, dragged by the impact of salary hikes and attrition. Its EBIT and profit after tax, too, fell, missing estimates.

Here’s what analysts have to say about TCS’ first-quarter FY22 results…

Citi

  • Rates ‘sell’, cuts target price to Rs 3,080 from Rs 3,220 apiece.

  • Q1 came in slightly below expectations on revenue, with India business coming in weak QoQ as expected.

  • Attrition went up to 8.6% (vs 7.2% QoQ); have been highlighting supply-side challenges for the sector.

  • Trims EPS by 1-2%.

  • Finds valuations high for a FY20-23E EPS CAGR of 7%.

JPMorgan

  • Remains ‘overweight’ on TCS for its cross-cycle strengths; has a target price of Rs 3,650.

  • TCS’s strong signing and strong growth in the U.S./U.K. reflects a very strong demand environment, helped by demand from IT megatrends and cost takeout, in addition to its market success.

  • Misses estimates across revenue, margin and EPS, led by India/EU.

  • Deal wins continued to be strong at $8.1 billion, up 17% YoY, but down 12% QoQ.

  • Misses on revenue and margin are likely to weigh on the stock in the near term.

Emkay

  • Maintains ‘hold’ with a target price of Rs 3,500.

  • The management remains confident about the revenue growth trajectory in FY22 on broad-based demand, strong deal intake (8.1 billion in Q1; 17% YoY), healthy deal pipeline, and traction in cloud, cybersecurity, analytics and enterprise application services.

  • Lowers FY22/23/24 EPS estimates by 1.3%/0.1%/0.1%, after factoring in Q1FY22 revenue miss.

  • TCS well-positioned to benefit from the strong demand environment, acceleration in cloud adoption and digital transformation opportunities.

  • Revenue miss and rich valuations will weigh on stock performance.

UBS

  • Rates ‘neutral’ with a target price of Rs 3,345 apiece.

  • Q1 FY22 revenue and margin miss forecasts expect consensus earnings cuts post Q1 FY22 numbers, which should elicit a negative reaction from stock.

  • Broader market concerns (Covid-19 wave 3, oil prices, etc), however, could keep the stock defensive.

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