Tata Consultancy Services (TCS) September quarter results beat Street estimates on revenue and margin fronts, but marginally. Attrition remained high, with signs of slowdown visible in moderate hiring and flattish sequential order wins.
Given, there are concerns over revenue growth in the second half of FY23 due to furloughs in the December quarter and demand concerns in Europe, any material upgrades to earnings per share (EPS) estimates were missing.
On Tuesday, the scrip was trading at Rs 3,091.50, down 0.95 per cent. The scrip is down 19 per cent year-to date. A handful of analyst targets on TCS suggest up to 16 per cent potential upside ahead.
Nomura India expects TCS to lag behind Infosys on revenue growth in FY23-24, as it kept its earnings estimates and target price of Rs 2,620 unchanged for TCS, based on 21 times FY24 estimated EPS of Rs 125.
“There was no mega deal (over $500 million), had a few $ 400 million deals and most were small- and mid-sized deals. TCS indicated that clients are taking longer than usual to close large deals given the macro uncertainty, leading to a lower proportion of qualified deals in the overall pipeline. We note higher uncertainty in Europe due to energy security issue in the upcoming winter,” Nomura said.
YES Securities has cut its rating on TCS to ‘ADD’ from ‘BUY’ with revised target price of Rs 3,536 per share at 27 times on FY24E EPS.
This brokerage said deal environment remains strong, but there are definite signs of slowdown in deal conversion cycle on account of economic growth concerns in the US and Europe.
For the quarter, TCS reported a net headcount addition of 9,840 employees against a net addition per quarter of 25,800 in FY22. This is at a time when the last twelve-month (LTM) attrition rose 180 basis points to 21.5 per cent. Slowing hiring momentum despite elevated attrition levels indicates lower demand visibility ahead, said ICICI Securities.
This brokerage is expecting a muted revenue growth for TCS in H2FY23 due to furloughs in December quarter and weak macro environment, especially in Europe & UK.
Increase in interest rates, slow economic growth, and elevated geo-political tensions have adversely impacted the macro environment and raised concerns over IT spends, said Motilal Oswal Securities.
“Given TCS’s size, order book, and exposure to long duration orders, and portfolio, it is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth. Owing to its steadfast market leadership position and best-in-class execution, the company has been able to maintain its industry-leading margin and demonstrate superior return ratios,” Motilal Oswal Securities said while suggesting a target of Rs 3,580 on the stock.
TCS reported revenue of $6,877 million for September quarter, up 4 per cent sequentially in constant currency terms and 1.4 per cent QoQ in dollar terms. Growth in CC terms was above consensus estimates, but lower in dollar terms due to higher cross-currency headwinds. Margin at 24 per cent was higher than 23.7 per cent, ahead of consensus estimate of 23.8 per cent. Profit for the quarter rose 8.38 per cent year-on-year (YoY) to Rs 10,431 crore.
Nomura India finds the stock Rs 2,620-worth, which suggests a 16 per cent potential downside. Kotak values the stock at Rs 3,450 while ICICI Securities sees the stock at Rs 3,191.