Gopinathan's resignation will not hurt TCS much; add stock on dips: Experts

Analysts say the stock price could turn volatile in the near-term as the development comes amid a challenging macro-environment including fears of a potential recession in the US

Shares of Tata Consultancy Services (TCS) hit a four month low of Rs 3,145 per share in the intra-day trade on Friday as investors digested an unexpected change of guard at the information technology major.

The company’s managing director (MD) and chief executive officer (CEO), Rajesh Gopinathan, on Thursday stepped down, dragging the stock of the Mumbai-based company to its lowest level since October 27, 2022. It, eventually, settled at Rs 3,179 (down 0.18 per cent), as against 0.67 per cent gain in the Nifty50 index, and 1.2 per cent in the Nifty IT index. 

Analysts, however, believe that the surprising departure of Gopinathan will not hurt the growth prospects of the company.

"Gopinathan’s departure from TCS is surprising, as he has led the company for only six years, and was expected to continue for the long term given his age (52 years). However, given the incoming CEO K. Krithivasan's potentially long tenure at TCS (34 years), the company will maintain its operational performance intact. Moreover, he should help TCS maintain its track record of seamless transition," said analysts at Motilal Oswal Financial Services.

Rajesh Gopinathan had been at Tata Group since the beginning of his career, when he joined Tata Strategic Management Group in 1996. He had moved to TCS in 2001. Since then, Gopinathan has held various positions, including chief financial officer (CFO; between 2013–17), before being appointed as CEO in February, 2017. During his short stint, he delivered industry-leading growth among large-cap peers, adding over $10 billion in incremental revenue.

"Rajesh Gopinathan delivered a strong financial performance as CEO, with TCS delivering revenue/earnings CAGR of 13 per cent/11 per cent over FY18–23 (despite Covid impact and industry slowdown). While this change comes as a surprise, we view this as a continuation of a trend at TCS, wherein baton shall be passed from one veteran to another," said those at Nuvama Institutional Equities.

'Nil disruption'

Analysts expect nil disruption from the development as Gopinathan will continue with the company till September 15, 2023, enabling a smooth transition.  

That apart, analysts don't foresee any meaningful leadership attrition due to this change as K. Krithivasan handles a large BFSI portfolio of $11 billion, and has been a regular contributor in the strategic direction of the business.

As an investment strategy, analysts say the stock could remain volatile in the near-term as the development comes amid a challenging macro-environment including fears of a potential recession in the US, the overriding market for Indian IT services, and a prolonged slowdown in Europe.

Besides, sharp cross-currency movements and the rupee’s appreciation against the US dollar, the Euro, and the British Pound; pricing pressure; and attrition and retention dynamics are other key risks.

However, any price correction, they said, could be used as an opportunity to add the stock as valuation (24x FY25E EPS) is inexpensive, making the risk-reward profile attractive.

"The move would act as a near-term overhang on the stock, but it will unlikely lead to its underperformance relative to peers in the coming months," said Morgan Stanley.

MOFSL expects TCS' US dollar revenue CAGR to be 11 per cent, and rupee EPS CAGR to be 16 per cent over FY23-25.

So far in calendar year 2023, TCS stock has slipped 2.4 per cent as against 5.53 per cent drop in the Nifty50 index, and 0.88 per cent gain in the Nifty IT index.