TCS Q1 results: First miss in a year likely to drag stock in the short term

NEW DELHI: ‘ June quarter earnings came in slightly below analyst estimates, led largely by weakness in its India business.

Deal wins were healthy despite the absence of major deals, while margin declines during the quarter were in line with consensus estimates. Attrition jumped, but remained in single digits.

Despite the Q1 miss, analysts are confident about TCS’ FY22 growth prospects and said the IT major is in a better position than peers to handle cost pressures. That said, the lack of positive surprises on the revenue or margin fronts may weigh on stock, which is trading near record high levels.

TCS’ sequential revenue growth at 2.4 per cent in constant currency terms was lower than consensus estimate of 3.3 per cent. Ebit margin declined by 133 basis points to 25.5 per cent, which was broadly in line with expectations. The fall in margin included a 170 basis points hit due to wage hikes, which was partly offset by a 30 basis points forex tailwinds.

JPMorgan revised its price target of Rs 3,650 from Rs 3,680, and said since the stock was flirting with all-time high levels, lack of margin or growth surprise is likely to weigh in the near term.

“TCS’ first miss in a year is likely to weigh on the stock in the near term, given the high expectations. We look through the blip and see solid growth ahead,” it said.

Deals wins for the quarter stood at $8.1 billion compared with $9.2 billion in the March quarter and $6.9 billion in the year-ago period. HSBC Global Research has revised its price target for the stock to Rs 3,455 from Rs 3,470.

“The company saw a 70-80 basis points hit on India billing dur to the second Covid wave. Even after accommodating this, which we expect to reverse in coming quarters, we believe the earnings upgrade cycle is largely behind TCS,” HSBC said, adding that double-digit growth in FY22 would not be representative of medium-term growth.

HSBC, however, continues to value TCS at 31 times EPS, a 45 per cent premium to the market, owing to strong operational metrics and the company’s ability to manage cost pressures better than the industry.

“We will maintain our overall estimation of double-digit growth for FY22; this is not compromised. The $8.1 billion order book is well distributed across markets and verticals,” MD and CEO Rajesh Gopinathan said after June quarter earnings.

CLSA has an ‘outperform’ rating on the stock with a target of Rs 3,770. It said the company’s strategic priorities for FY22 and beyond are changing and felt the margin defence should keep cash conversion healthy.

Macquarie has a target of Rs 3,640 on the stock. It has changed its FY22-23 EPS estimates marginally and expects growth pickup to add stability. Citi has a ‘sell’ call on the stock, trimmed EPS estimates by 1-2 per cent and set the price target at Rs 3,080.

“TCS is one company which can emerge stronger out of this crisis, bouncing back strongly in FY22. We expect TCS to continue to command valuation premium to its peers on the back of a strong diversified profile, superior return profile (RoE of 38 per cent), management stability and market leadership position,” Phillip Capital said.

The largest software services firm reported a 28.5 per cent YoY growth in consolidated net profit at Rs 9,008 crore for June quarter compared with Rs 7,008 crore in the year-ago quarter. Consolidated revenue from operations rose 18.5 per cent to Rs 45,411 crore from Rs 38,322 crore.

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