A weak Q4 and concerns on margins dragged the stock price of IT major Tata Consultancy Services (TCS) down 1.6 per cent on Thursday to ₹3,189.85. The stock hit a high of ₹3,226 and low of ₹3,181.05 during the day.
TCS results have evinced mixed response from the brokerages – a clear divide between Indian and international brokerages. A poor Q4 show notwithstanding, domestic brokerages are upbeat about this stock. While they recorded their disappointment by revising the target price by 1-2 per cent, most of them gave a thumbs-up to the stock with a Buy or Add rating. However, most international brokerages sing a different tune, with only a few like Bernstein, BNP Paribas and CLSA coming out with a bullish ‘Outperformer’ call even as JP Morgan, Citi and Nomura came with bearish call while Morgan Stanley, Jefferies and Credit Suisse are Neutral.
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BNP Paribas sees the deal-win data as the key metric to judge the demand environment, which it termed as “robust”. TCS reported an orderbook of $10 billion in Q4-FY23. “Deal-win TCV was strong, with a solid deal pipeline and accelerated deal velocity, especially in Europe.” The brokerage expected Indian IT services firms in general to navigate near-term headwinds and demand to remain resilient in FY24, however adding, “We bake in 4QFY23 results and management commentary leading to a marginal cuts to our FY24-25E EPS,” while giving a ‘Buy’ call.
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On the other hand, while remaining gung-ho about TCS’ long-term demand story, YES Securities explained that clients “are taking longer time for decision making and are slowing down discretionary IT projects, resulting in lower revenue growth in FY24.
Though Centrum Broking gave an ‘Add’ call, the anxious undertones of the analysts were unmissable in the report, which said, “TCS management indicated caution and uncertainty among clients in the near term which could further impact revenues as well as slow down margin improvement.”
Defensive play
Even while ICICI Securities cut FY24E-FY26 EPS estimates by 1-2 per cent “as we now assume lower margins for TCS due to a slight EPS miss in Q4FY23 due to margin disappointment”, it has not cut revenue growth forecasts of FY24E/FY25E/FY26E. “We believe TCS remains a defensive play in the current environment and will be a strong beneficiary of pick-up in demand in FY25E as currently-postponed discretionary projects start getting executed,” it said, while maintaining Buy.
For analysts at Credit Suisse, the TCS commentary was “incrementally negative” as US challenges are expected to linger in the near term. “We expect the stock to remain sideways given valuations are above 10Y average amidst uncertain macro and deceleration in growth,” it said, while maintaining a neutral rating.