TCS turns flat after gaining over 2%; brokerage views mixed post Q2

While revenue performance was in line with Street expectations, profits were ahead of analysts' estimates

Tata Consultancy Services, country’s largest software services firm, gained over 2% to Rs 2,605 in intraday trade on Friday after the company reported 2.16% year-on-year drop in net profit at Rs 6,446 crore, while revenue grew 4.3% to Rs 30,541 crore.

At 9:45 am, the stock was trading at Rs 2568.45, up 0.7% on the BSE. 

While revenue performance was in line with Street expectations, and was helped by improved business from clients, profits were ahead of analysts’ estimates aided by better margins and other income. CLICK HERE FOR DETAILED EARNINGS

Analysts at Edelweiss Securities believe the IT giant reported better-than-expected earnings in Q2FY18 and outlook commentary was also slightly better (even for Japan and Diligenta), although it lacked clarity on large segments like BFSI and retail.

“We maintain our thesis that TCS has sweated its margin levers to the fullest, leaving limited scope for higher earnings growth (FY18E PAT growth < revenue growth), implying fair valuation of 17.6 times its FY19E earnings per share (EPS) at CMP,” said Edelweiss Securities. 

“We believe, TCS is a dividend/buyback play till margin uptick/high growth starts. We maintain ‘HOLD/SP’ with target price of Rs 2,315 (16x FY19E EPS),” it added. 

Analysts at Emkay Global also believe that the company has delivered strong growth and profitability performance despite sustained pricing pressure and weak rupee realisations. “We have built in revenue/earnings CAGR of about 9.3%/9.5% over FY18-20e and may revisit our estimates,” they said. 

However, Motilal Oswal Securities maintained ‘neutral’ view on the stock, saying it sees a lack of triggers, especially given the uncertainty around expectations of a revival of spend in the vertical.

“Our 1-2% earnings upgrade follows above-estimate margin performance by TCS. However, continued low growth in its largest segments is deterrent to an investment case at current valuations. Improvement in larger verticals, especially BFS, will be key to rerating,” it said.