TCS shares at Rs 4,700! UBS says market ignoring this factor

Tata Consultancy Services Ltd (TCS) has received a 'Buy' call from UBS with a revised target of Rs 4,700 from Rs 4,050 earlier, as it felt that "the leader is back" and that the stock market is ignoring the fact that the largest IT firm could lead peers in sales growth by 100-150 basis points, in addition to reporting an improvement in FY25 margins.

UBS said that the market is not completely taking into account the impact of the large deal ramp-up and scope of margin improvement through utilisation, pyramid restructuring etc. It believes the market could be positively surprised by margin expansion in the coming quarters.

UBS said, given a divided consensus, the market is not pricing this in a superior revenue growth, as the stock stayed at the lower end of its long-term trading premium against peers. The brokerage upgraded the TCS stock to 'Buy'. Following this, TCS jumped 2.19 per cent to hit a high of Rs 4,088.10.

"TCS' current multiple premium over peers is below the historical average, and any outperformance makes the case for a re-rating, providing comfort in using the current multiple," it said.

UBS said TCS may outperform its peers on revenue growth front in FY25 by ramping up large deals, revival of the BFSI segment, by winning managed services deals and likely return of cloud and discretionary spending (as per IT partner conversations).

"We believe TCS should be a key beneficiary of these trends and likely an outperformer relative to its peers. Strong revenue growth along with management's cost rationalisation efforts should lead to expansion of operating margins. TCS has won multiple large deals in the managed services space, the ramp-up of which should start aiding revenue growth," UBS said.

The foreign brokerage said that the third-party consultants are pointing to likely improvements in IT spending in managed services and As-a-Service in 2024.

"Revival surfacing in VC funding in the fintech space which is directly correlated with BFSI tech spend. Further, conversations with VCs and client commentaries suggest a potential revival in BFSI as well as cloud migration projects. In terms of margins, falling attrition should increase utilisation levels and lead to margin expansion," it said.

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