After a dismal performance by Infosys and a crash in its share price, TCS results provided much needed relief. Reacting to its results, TCS' stock moved up by 2.18% at Rs 1,263. While analysts in general have responded positively to TCS’ results, Kotak Securities have downgraded the stock from ‘ADD’ to ‘REDUCE’.
Here are the five reasons why Kotak believes TCS deserves a downgrade:
1. A slowdown in the sector and lack of consolidation will result in lower pricing pressure and impact profitability of TCS along with the industry.
2. Substantial reduction in incremental growth opportunity in the existing markets and a collective failure in expanding addressable markets beyond the traditionally strong areas.
3. Increase in Tier-1 players as compared to that 3-4 years back, vying for larger share of the volumes. This mismatch between incremental growth available and higher growth aspiration for existing players is leading to aggressive pricing behavior.
4. TCS’ pricing has declined in four of the past five quarters, despite the company indicating stable pricing environment. Pricing declined 1.1% quarter-on-quarter in June 2012 quarter.
5. As a result earnings expectation has been reduced by 1.7-6.0% for FY13 and FY14 and the target price has been cut to Rs 1,125 as compared to Rs 1,280. Currently TCS trades at a valuation of 18.2 times its FY13 expected profit, which is expensive given the backdrop of weak pricing environment and deterioration in industry growth.