Tata Consultancy Services Ltd (TCS) Q2 results disappointed stock analysts a bit, as client-specific issue hit growth, with sales and margin for the quarter coming in lower than expectations. Growth was lower, thanks to weakness in Life Sciences & Health Care and Communication, Media and Technology (CMT) verticals. That said, the biggest vertical, BFSI, showed signs of recovery. TCS also witnessed a strong performance in growth markets, anlaysts said while retaining their 'Buy' ratings on the stock.
Sanjeev Hota, Head of Research at Sharekhan said TCS reported a weak set of numbers and while the revenues miss was tad below his estimates, margins performance surprised him negatively. Further, deal wins at $8.6 billion was below his expectations and 8-quarter average of $9.6 billion. On the positive side, employee headcount increased 0.9 per cent QoQ, the second quarter on a row, Hota said.
"BFSI vertical up 1.9 per cent QoQ in dollar terms, higher than company average growth. With the US Fed easing cycle and stable macro prints, growth recovery narrative still hold true for IT sector and TCS as a whole, steeping into second half of fiscal FY25 and whole of FY26. We have a BUY rating on TCS," he said. The IT major announced a second interim dividend of Rs 10 per share.
Nuvama Institutional Equities said TCS delivered modest, but in-line Q2FY25 results. The Q2 revenue was slightly below its and Street’s estimate of 1.3 per cent in constant currency (CC) terms sequentially.
"EBIT margin decreased 60 bp QoQ to 24.1 per cent, in line with our estimate of 24.2 per cent, but surprisingly short of Street’s aggressive estimate of 24.9 per cent. The management remains optimistic about demand revival as they see a recovery in BFSI and bottoming out of the retail vertical. We are cutting FY25E/26E EPS by 4.9 per cent/3.9 per cent, factoring in slightly lower growth and margins. We continue to value TCS at 30 times Sep-26E PE. Maintain ‘BUY’ with a revised TP of Rs 5,100 (earlier Rs 5,250)," it said.
MOFSL said the TCS growth for the quarter was primarily driven by the BSNL ramp-up. The decline in North America was surprising, but this was attributable to client-specific issues in healthcare and persistent weakness in communications vertical, MOFSL said.
"Last quarter marked a significant shift in client behavior, as the recovery in the US banking sector started taking shape—a trend that continued into this quarter’s commentary too. Admittedly, there was little in the way of incrementally positive outlook as compared to 1Q, and the precarious geopolitical landscape and continued macro uncertainty could keep the recovery range-bound," it said as the brokerage thinks a J-curve recovery may not materialise for TCS.
Given its size, order book and exposure to long-duration orders and portfolio, TCS is well-positioned to grow over the medium term, the brokerage said.
Owing to its steadfast market leadership position and best-in-class execution, the IT firm has been able to sustain its industry-leading margin and demonstrate superior return ratios, it said while suggesting a positive stance on TCS. MOFSL has a target price of Rs 5,400 implies 33x Sep’26E EPS, with a 28 per cent upside potential. We reiterate our BUY rating on the stock.
Antique Stock Broking maintained 'Hold' on TCS and slightly reduced its target price to Rs 4,425 from Rs 4,450 due to a minor adjustment in its margin assumptions for FY26 and FY27.
"Additionally, we are rolling over our valuation multiple to FY27 (from 1HFY27) and lowering the forward PE multiple to 26 times from 27 times, to reflect ongoing weakness in discretionary demand," it said.
The key things to consider going ahead would be the management plans to achieve its margin guidance of 26-28 per cent in FY25 and the likely shape up of net headcount addition in the coming quarters, Sagar Shetty, Research Analyst at StoxBox said.
"The company’s outlook on its order book and demand environment would also be key factors to watch," Shetty said.