TCS shares: InCred lowers target price, sees productivity pass-back & 'America First' as key headwinds

InCred Equities said it has trimmed Tata Consultancy Services' (TCS') earnings estimates due to a potential slower global growth, change in the clients' IT spending pattern due to the impact of tariffs and pass-back of productivity gains led by infusion of artificial intelligence (AI).

"We trim 4QFY25F US$ revenue qoq (quarter-on-quarter) growth to 0.6 per cent and now model in a 4.5 per cent $ (US dollar) revenue CAGR over FY25F-27F, vs. 7.5 per cent earlier. Our prior growth assumptions were predicated on demand uptick in the financial services (FSI) industry in the US (aided by the recovery in regional banks), and short cycle projects and encouraging client conversations & decision-making. However, the tariff-led uncertainty could drive caution, given the potential earnings cut across user industries," the brokerage stated in its recent report.

InCred believes productivity pass-back and 'America First' could be key headwinds for the largest software exporter. "The supply side environment could remain benign, pass-back of productivity gains, reinitiation of vendor consolidation-led deals with longer transition times, and potential revisit of the 'America First' policy are key headwinds to the EBIT margin profile of the sector partly offset by a depreciating Indian rupee (INR). As a reminder, US President Donald Trump had signed an executive order in his first term that led to onsite hiring and impacted gross margin. TCS has the best execution in the industry and hence, the cut in the average FY25F-27F EBIT margin is a modest 30bp at 25.4 per cent," it mentioned.

The broking firm retained its 'Add' rating for TCS shares but with a lower target price. "We adjust our estimates modestly and now expect FY25F-27F $ revenue CAGR of 4.5 per cent (vs. 7.5 per cent earlier) and PAT (Rs) CAGR of 9.2 per cent (vs.11 per cent). We retain our target PE/G multiple of 2.6x to arrive at our target P/E of 24x (28x) FY27F EPS to arrive at a lower target price of Rs 3,925 (Rs 4,915 earlier)," it said.

"Operating cash flow and dividend payout ratio certainty, and healthy return ratios help retain the target PE/G multiple. Slower recovery in the North America (NA) geography & the FSI vertical, weak bookings in 1HCY25F and higher project cancellations are key downside risks to our growth assumption and target price," it further stated.

On Monday, TCS shares rose 0.36 per cent to settle at Rs 3,496.55. At this price, the stock has slipped 14.98 per cent on a year-to-date (YTD) basis.