Tata Consultancy Services (TCS) has come out with soft March quarter results, as revenues and margin both failed to meet the Street expectations, leading to price target cuts by a handful of brokerages. Analysts said the near-term visibility on order flows stays low and that TCS' growth may lag that of peer Infosys going ahead. Their price targets vary from as low as Rs 2,638 to as high as Rs 3,860.
Nomura India said TCS’ constant currency (CC) revenue growth of 0.6 per cent was weaker than the consensus estimate of 0.9 per cent CC growth. EBIT margin at 24.5 per cent was also lower than the Street estimate of 25 per cent. While the total contract value (TCV) of $10 billion was in line with expectations, heightened macroeconomic volatility continues to delay the recovery in US across verticals, even as the outlook is improving in continental Europe.
"BFSI clients remain in cash preservation mode, especially after recent volatility in financial markets. Management noted that certain discretionary projects are being deferred or put on hold as clients prioritise those projects which have upfront cost savings. We expect dollar revenue growth of 6.6 per cent in FY24F (vs 8.6 per cent in FY23) and 6.3 per cent in FY25F," Nomura India said.
Nuvama Institutional Equities said the management talked about increasing near-term uncertainty in the overall demand environment – driven by weak global macros and ongoing banking concerns – leading to delayed decision-making.
"On balance, we are trimming FY24/25E EPS by 1.3 per cent/0.3 per cent. This along with a valuation rollover to 25 times FY25E PE (from 30 times FY24E PE) yields a target price of Rs 3,750 against Rs 4,100 earlier. Nomura has cut its price target to Rs 2,830 from Rs 2,850.
Kotak Institutional Equities said it expects a subdued demand outlook on near-term tech spending. Recent events in the US regional banks have induced greater caution on spending by a broader set of industries, more so in the US, it said.
"We broadly maintain FY2024-25 revenue estimates. We, however, cut EPS estimates baking in lower margins. We maintain fair value for TCS at Rs3,320, valuing the stock at 22 times FY2025E EPS," it said.
JPMorgan has a target of Rs 2,700 on the stock, Citi has a target of Rs 3,000, Jefferies Rs 3,375, CLSA Rs 3,550, Morgan Stanley Rs 3,350 and Bernstein at Rs 3,560.
"We are calling for 4-8 per cent CC growth (400bps range) whereas the Street seems to be working with a 6-8 per cent number (with a 200bps corridor)," said Nirmal Bang Institutional Equities.
The very fact that the total contract value of FY23 came in a tad lower than that of FY22 does indicate incremental growth slowdown, it said.
While pricing seems stable currently, the brokerage sees a push-back by clients in FY24 as macro conditions will be much more challenging than in FY23.
"Overall, we believe that revenue growth will likely be in the 3-5 per cent region for TCS against consensus expectation of high single-digit growth, with margins modestly moving up as Utilization tightens and pyramid benefits kick in. We have an explicit view of a shallow recession in the US in 2023 and hence our near-term cautious view," Nirmal Bang said adding that the Street might be overestimating industry growth by 300-400 bps!
This brokerage has a target of Rs 2,638 for the stock.
Motilal Oswal Securities has maintained its positive stance on TCS. It has a target price of Rs 3,860 on the stock.
"Given TCS’s size, order book and exposure to long duration orders and portfolio, it is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth," the brokerage said.
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