TCS shares at Rs 2,930? Why Q2 results, buyback, dividend failed to cheer investors

Tata Consultancy Services (TCS) recorded its second-best ever deal wins in the September quarter, which beat analyst expectations. It announced a Rs 17,000 crore in share buyback and also Rs 9 per share in second interim dividend. Ebit margin also came in better than Street estimates. But a flattish constant currency (CC) revenue growth soured mood. Analysts noted that the compression in the existing book of business was faster than the ramp-ups in new projects and that two of TCS' large projects in Europe had come to an end while there were no large-scale deals to replace them.

Clients were cautious, TCS said, which Nirmal Bang noted is similar to the management commentary three months ago.

"It did not want to indicate when the turnaround would happen or whether 2HFY24 would be better than 1HFY24. Visibility seems quite low," it said while suggesting a target of Rs 2,930 on the stock.

For the quarter, TCS reported a dollar revenue of $7,210 million, down 0.2 per cent sequentially. Constant-currency growth came in at 0.1 per cent sequentially. Analysts were expecting the growth in 0.8-1.3 per cent range.

"The near-term outlook is weak and disappointing but does not dent hopes for a better FY2025. The new CEO has not initiated any major change except for a reversion to vertical-based organizational structure. The stock trades at premium valuations, justified but limits significant upside in the near term," said Kotak Institutional Equities.

The order book is holding up, but near-term visibility remains low, said Nomura India. It noted that weak headcount addition persists, even as attrition stays moderate. This brokerage has a 'Reduce' on TCS with a target of Rs 3,030.

Motilal Oswal said TCS should benefit from its scale and ability to optimise talent to control costs in the near to medium term.

"This is especially visible in the fact that it has given timely increments despite growth concerns, which we expect to pay out over the medium term through easing attrition. This should allow it to deliver a 12.2 per cent PAT CAGR over FY23-25," it said. That said, the bokerage has trimmed is FY24 EPS estimate by 0.7 per cent and FY25 EPS estimates by 1.8 per cent abd suggested a target of Rs 4,060 on the stock.

Goldaman Sachs has a target of Rs 4020 on the stock, HSBC finds it worth Rs 3,625. Morgan Stanley has reduced its target to Rs 3,590, Bernstein sees it at Rs 3,950. Citi maintained its sell on the stock with a target of Rs 3,170.

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