Here is why TCS shares declined 4% today despite a strong Q4 earnings show

Analysts at ICICI Securities, for instance, have downgraded TCS' stock from 'Add' to 'Hold' while Kotak Securities maintains 'Reduce'

Shares of information technology major Tata Consultancy Services (TCS) tumbled 5.1 per cent to Rs 3,074.55 apiece on the BSE in the intra-day deals on Tuesday, and were trading as the worst performing counter on the 30-share BSE barometer as invetors booked profit after an in-line result. The counter ended 4.2 per cent lower on the BSE at Rs 3,105 levels, as compared to 1.4 per cent rise in the S&P BSE Sensex.  

India's largest IT services player on Monday reported a strong set of numbers for its fourth quarter of FY21, as clients continued to spend on digital services and focused on reimagining their business operations. The biggest takeaway from the Q4 numbers was the order book at $9.2 billion, the highest-ever reported by TCS in a quarter since the company started reporting this metric.

TCS’ net profit for the quarter was up 14.9 per cent at Rs 9,246 crore year-on-year, and 6.2 per cent quarter-on-quarter (QoQ). Revenue, meanwhile, grew 5.9 per cent YoY and 4.2 per cent QoQ at Rs 43,705 crore.

For the full year, the company reported revenue of about Rs 1.65 trillion, up 4.6 per cent but on a constant currency basis revenue was down 0.8 per cent.

Commenting on the performance, Rajesh Gopinathan, chief executive officer and managing director, TCS, said the company entered FY22 more confidently and with better visibility. “As I have stated in the past, growth is being led by core transformation opportunities such as cloud migration, application transformation, and digital services. Our focus going into FY 22 will be to engage with clients in their growth agenda, propelled by innovation and leverage of collective knowledge,” he added. READ MORE HERE

Analysts' view on Q4 numbers

The results, however, elicited mixed response from analysts as they fear that despite a strong earnings show, the stock is trading at premium valuations and has factored-in most of the positives. Therefore, the stock price may have limited upside from here on.

Sudheer Guntupalli and Hardik Sangani, research analysts at ICICI Securities, for instance, have downgraded the stock from 'Add' to 'Hold' as they believe the industry growth is unlikely to witness a meaningful acceleration (vs pre-Covid) over medium term as is expected by the street. Moreover, given the good pace of vaccination in core markets like US / UK, potential resumption of costs related to marketing events / onsite travel (in H2FY22) is a key thing to watch out for. 

"As we rebase our exchange rate estimates (now INR/$ = 75/76 for FY22/FY23E), FY22E EPS witnesses around 5 per cent upgrade even as FY23E EPS remains largely stable. We downgrade the stock to HOLD (from ADD earlier) with an unchanged target price of Rs 3,350 (implying 30x FY23E EPS)," they said in a result review report. 

That said, in the context of 2nd wave in India, they expect TCS to command relative investor interest given low / no disruption to IT and perception of the stock as a cash proxy during heavy market volatility.

Those at Kotak Institutional Equities, too, maintain 'Reduce' rating on the stock owing to the stock's expensive valuations. "At 27.4X FY2023E, upside is limited. We maintain our REDUCE rating. Our EPS increases by 2-3 per cent due to a change in INR/USD assumptions by KIE’s economist. Fair value increases to Rs 3,250 due to roll over and after baking in EPS revision," they said in a report.

Globally, foreign brokerage Citi has a 'Sell' call as valuations at 31x 1yr forward (2-SD above mean) is pricing-in positives. Nomura, on the other hand, has 'Neutral' rating on the scrip and they suggest investors to await better entry point.

That said, Credit Suisse (Outperform; TP: Rs 3,750), CLSA (Outperform; TP: Rs 3,370), Goldman Sachs (Buy; TP: Rs 3,646), and Macquarie (Outperform; TP: Rs 3,640) remain positive on the stock as they believe the sector has entered technology upcycle where TCS may continue to deliver industry leading growth.

"TCS is on track for double-digit growth for FY22 and remains well positioned to benefit from 3 key spending themes: cloud transformation, customer experience, & core modernisation," brokerage firm Macquarie said in its result review report.