TCS following Q1 earnings: Investors should decide whether to buy, sell, or keep the stock.

TCS following Q1 earnings: Investors should decide whether to buy, sell, or keep the stock.

Revenue growth in constant currency (cc) was 15.5 per cent annually (YoY).

Following the release of the company’s June quarter earnings, the share price of Tata Consultancy Services (TCS) fell 2% in early trading on July 11.

The leading provider of IT services announced on July 8 that its consolidated net profit for the three months ended in June 2022 improved by 5.21 per cent to Rs 9,478 crore from Rs 9,008 crore in the corresponding period the previous year. The profit decreased by 4.51 per cent sequentially.

The quarter’s operating revenue totalled Rs 52,758 crore, up 4.28 per cent from the prior quarter and 16.17 per cent from the preceding quarter.

The business reported 15.5 per cent yearly growth in constant currency (cc) revenue (YoY). The operating margin decreased by 2.4 per cent year over year to 23.1 per cent.

Following the June quarter earnings, the following is what brokerages had to say about the stock and the business:

1. Prabhudas Lillian

Due to (1) margin reductions of 100bps/20bps for FY23/24, given (a) a sharp decline in Q1 margins, (b) headwinds from onsite wage inflation, and (c) travel costs likely to persist, we reduced EPS by 4.2 per cent/2.1 per cent, and (2) a reduction in FY24 revenue because we believe demand will normalise despite deteriorating macroeconomic conditions, particularly in Europe.

We maintain our 28x FY24 EPS valuation of TCS to arrive at a target price of Rs 3,607 per share (earlier Rs 3683).

With revenue/EPS CAGR of 8.7 per cent/10.9 per cent during FY22-24E, the company is currently trading at 28.8x/25.4x on FY23/24 EPS of 113.3/128.8. Continue to “Accumulate.”

2. Mr Oswal Motilal

The macro-environment has been impacted, raising questions about IT spending due to increased interest rates, weak economic growth, and increased geopolitical tensions.

TCS is well-positioned to survive the deteriorating macro climate and benefit from the predicted industry growth due to its size, order book, exposure to long-term orders, and portfolio.

TCS consistently exhibited best-in-class execution while maintaining its market leadership position. It enables the business to keep its market-leading margin and show outstanding return ratios.

We continue to have a favourable opinion of TCS. Our target price of Rs 3,730 implies 28x EPS for the FY24E and has a potential upside of 14%. We restate our Buy recommendation.

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3. The HDFC Securities

TCS’s performance was in line with expectations. Essential comments for the future include the following:

  • The near-term volume driver will continue to be horizon-1.
  • The demand climate will be more robust in North America than in Europe.
  • There will be more vendor consolidation and multi-service arrangements.
  • The profit trajectory will improve (Q4FY23 margins to reach the Q4FY22 level).

Our target price of Rs 3,620 is based on 28x FY24E EPS with an EPS CAGR of 11% over FY22–24E (compared to the 5Y average of 25x and 8% EPS CAGR), and it is backed by an FCF/payout yield of 4/3%; we keep TCS in ADD.

4. Citi

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With a target price of Rs 3,015 per share, brokerage firm Citi has maintained a sell rating on the stock and expects more downgrades.

In a challenging economy, the company finds it difficult to defend premium valuations of 30x FY23e.

According to CNBC-TV18, Citi has reduced the projections by 0–2 per cent and the multiple to 26x.

5. Cash Suisse

The stock was downgraded from overweight to neutral by research firm Credit Suisse, and the target price was decreased from Rs. 4,350 to Rs. 3,275 per share.

Although the margin for the first quarter fell short of expectations, the prognosis beyond FY23 is unknown.

According to the research house, it is not experiencing any client pushback on demand and has refrained from speculating on the market beyond FY23.

The company anticipates North America will be the region driving growth over the next three to four quarters, with less of an impact from the recession than in the UK or Europe.

According to CNBC-TV18, Credit Suisse reduced its EPS forecast for FY23 to FY25 by 3 to 10%.

6. Bernstein

The company continues to have an outperform rating from Bernstein, with a target price of Rs 3,840 per share.

Demand is consistent, and contract closings and pipelines are robust.

To account for the margin shortfall, the broker reduced the FY23/24 EPS expectations by 0.5/0.4 per cent to CNBC-TV18.

7. Goldman Sachs

With a target price of Rs 3,678 per share, brokerage firm Goldman Sachs has maintained its buy rating on the company.

As long as the emphasis on meeting demand is maintained, the Q1 was in line. The sequential decrease in the order book and personnel headcount hinted at an impending slowdown.

According to CNBC-TV18, the management kept reiterating the robust demand prognosis.

8. J.P.Morgan

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The stock continues to have an underweight rating from research firm J.P.Morgan, with a target price of Rs 2,800 per share. The outcomes and margin trajectory cannot support the weight of valuations.

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The Q1 print was disappointing with in-line sales and a margin miss of 60 basis points.

J.P.Morgan anticipates revenue headwinds in H2 as economic worries materialise, and they see ongoing margin pressure in FY23 due to supply issues.

CNBC-TV18 expects the company’s margin to remain below 25 per cent for the foreseeable future and reduced its margin prediction by 30 basis points.

9. Nomura

Due to the disappointing Q1 performance on all fronts, brokerage Nomura has maintained a cut recommendation on the company with a target price of Rs 2,910 per share.

The company is heavily impacted by declining growth and margin pressures, and the order book is beginning to flatten.

According to CNBC-TV18, Nomura has decreased its FY23–24 EPS forecast by 1.4–2.5 per cent due to the growth continuing to trail Infosys.

10. Stanley Morgan

The stock has an equal-weight rating from Morgan Stanley, with a target price of Rs 3,900 per share.

The Q1 topline and margin failure will result in a 3–4% decline in consensus expectations. The impact of macro uncertainty on valuation multiples will be significant.

According to CNBC-TV18, the margin would gradually increase to 25 per cent or higher.

11. Institutional Equities Kotak

Considering that the Q1 was a consistent quarter with CC revenue growth of 3.5 per cent, QoQ, Kotak Institutional Equities has maintained add rating on the stock with a target at Rs 3,400 per share.

We believe the margin decline has bottomed out and will continue to recover going forward, but it was steeper than anticipated.

Despite the small deal victories, June is not the strongest quarter for deal wins. Future demand may slow down, but the corporation will win market share from competitors, according to CNBC-TV18.

Tata Consultancy Services was trading at Rs 3,179.80 at 9:18 a.m. on the BSE, down Rs 85.05 or 2.61 per cent.

What worries TCS shareholders:

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Constant currency revenue growth and TCS’ Q1FY23 Ebit margin fell short of market expectations.

The management’s analysis of the demand outlook and deal pipeline is still robust.

Investors in Indian information technology (IT) equities are primarily uneasy because they worry that a future economic downturn brought on by interest rate hikes will hinder the deal-making of Indian IT companies, impacting their FY24 revenue growth. Second, margins are expected to be eroded by wage increases and the return of other costs in the quarter ending in June 2022 (Q1FY23).

The Q1 results of industry leader Tata Consultancy Services Ltd (TCS) provide little solace. Revenue increased by 3.5 per cent sequentially in constant currency, somewhat less than average profit projections of 3.6 per cent. However, management analysis of demand is still robust. The business pipeline is still strong, and the company is not currently observing any signs of slowing demand. However, the management keeps an eye on broader economic trends and engages with customers frequently. Regarding expectations for FY24’s sales or margin performance, the TCS management remained silent.

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“Despite having an intact commentary, they suggested that the US will perform better than Europe because of customer worries about the recession.

In contrast to the present perception of no impact on tech spending, in our opinion, this is the first hint of industry comments turning more realistic, according to analysts at Motilal Oswal Financial Services Ltd.

Earnings before interest and taxes, or Ebit, decreased to a multi-year low of 23.1% from 25.1% in the previous quarter, falling short of the consensus prediction of 23.6%. Therefore, TCS’ Ebit margin is below its desired range of 26 to 28 per cent. Salary increases, supply-side difficulties, higher subcontracting costs, and a rise in travel expenditures all harmed the margin. The management predicted that starting in Q2FY23, the margin would begin to recover sequentially.

Analysts are cautious. “For the company to prevent further downgrades in profits, TCS’ margin must quickly improve, “added an analyst with a global brokerage firm who asked to remain anonymous. In contrast to what was first anticipated, he said, it would take a few more quarters for attrition to start dropping appreciably. “Overall, one important lesson for investors in IT equities is that the Street underestimates margin pressure. We believe that Infosys could potentially underperform on margins following TCS’ Q1 earnings “said he.

According to LTM (last twelve months) data, TCS’ attrition rate increased to 19.7 per cent in Q1 from 17.4 per cent in Q4FY22.

The attrition rate is expected to continue to rise through the second half of FY23, but only after a further increase in Q2FY23.

In addition, TCS hired a net of 14,136 workers in Q1FY23, a low number. According to Nirmal Bang Institutional Equities experts, this compares to an average of about 23,000 over the preceding six quarters. Monitoring this indicator would be beneficial for IT stock investors. For FY23, TCS plans to hire 40,000 new employees.

The order book, another crucial metric, remained flat year over year (y-o-y) at $8.2 billion in 1QFY23.

According to the Nirmal Bang study, TCS’ overall order inflow for FY23 will at best be flat y-o-y and very likely be lower unless there is a significant jump in order inflow in the upcoming quarters.

Edited by Prakriti Arora

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