TCS Q2 result: Brokerages upbeat on margin improvement; macro risks remain

TCS Q2 earnings review: Its attrition inched up to 21.5 per cent over the preceding quarter's 19.7 per cent. It said the quarterly annualized attrition has peaked in Q2 and should taper down from here

Healthy broad-based growth across geographies and verticals helped IT giant Tata Consultancy Services (TCS) clock better-than-expected results in the July-September quarter (Q2FY23).

TCS reported an 8.4 per cent year-on-year (YoY) increase in net profits to Rs 10,431 crore, while its revenue rose 18 per cent YoY to Rs 55,309 crore.

Its profit margins also improved sequentially by 90 bps to 24 per cent aided by operating efficiency, and lower employee expenses.

However, the company’s attrition inched up to 21.5 per cent over the preceding quarter’s 19.7 per cent. The management said the quarterly annualized attrition has peaked in Q2 and should taper down from hereon.

The company said it has not witnessed any cuts in client budgets but noted an increased sense of caution in deal conversions with European clients.

Here’s what brokerages say:

Jefferies | Hold | TP (Target Price) raised to Rs 3,180

The brokerage has raised its FY23-25 earnings estimate by 2-5 per cent. It expects the company to deliver a 12 per cent EPS CAGR over FY22-24. It added that TCS' premium valuations may limit its upside.

CLSA | Outperform | TP Rs 3,450

The near-term revenue outlook remains intact with abating supply pressure. In the long term, we can witness some softness in demand but this does not raise alarms. Our confidence in the company’s margin management has increased.

Credit Suisse | Neutral | TP Rs 3,300

The demand scenario for FY24 demand scenario is still uncertain, but we have increased our FY23-FY25 estimated EPS estimate by 2-4 per cent to account for better margins in Q2 and currency benefits.

Macquarie | Outperform | TP Rs 4,150

The company has put to bed concerns that the margin issue could become structural. We continue to prefer TCS to Infosys (both OP). We expect the company to widen the margin gap with Infosys given its headcount addition plans.

Bernstein | Outperform | TP Rs 3,850

Commentary on deal closure and the pipeline was constructive while the company has remained watchful on macro risks.

CITI | Sell | TP raised to Rs 2,900

Growth in the UK and India geographies led the beat on estimates. Demand sustainability remains crucial. Management commentary came mixed given the global backdrop.

Motilal Oswal | Maintain Buy | TP Rs 3,580

Given its size, order book, exposure to long-duration orders, and portfolio, TCS is well-positioned to withstand the weakening macro environment and ride on the anticipated industry growth.  

Easing supply woes in the second half of FY23 with benefits from increased fresher additions previously and lower sub-contractor costs should aid margins. However, we remain concerned about the Q3 margin due to the timelines of cost optimization strategies. Our TP implies 27x FY24E EPS, with a 15 per cent upside potential.

Antique Broking | Maintain Buy | TP reduced to Rs 3,600

The company has alluded to current demand holding up well but with a sense of caution among clients. We remain confident about TCS’ ability to engage with large clients for their large transformation programs. But the growing risk of moderation in tech budgets prods us to cut the valuation multiple by 10 per cent to 27x (from 30x earlier) on FY24 EPS.

IDBI Capital | Maintain HOLD | TP Rs 3,235

In the near term, the brokerage expects the company’s revenue growth to remain robust. Although considering the high inflation and recession fear it remains cautious on the revenue growth outlook. It expects margins to ease in coming quarters led by easing of supply-side challenges, pyramid benefits and lower subcontracting costs.