Should you buy TCS post its June quarter numbers? Brokerages remain mixed

Shares of Tata Consultancy Services (TCS) slipped as much as 2.9 per cent to hit a low of Rs 2,070 apiece on the BSE in intra-day deals on Wednesday, a day after the IT bellwether announced its June quarter (Q1) results of the financial year 2019-20 (FY20). 

At 10:15 am, the stock was trading nearly 2 per cent lower at Rs 2,093.45 apiece on the BSE. In comparison, the benchmark S&P BSE Sensex was trading flat at 38,745 level, up just 13 points or 0.04 per cent.

TCS reported steady numbers for the quarter under review; however, the company’s revenue in dollar terms missed the Street estimates while a stronger rupee ate into its operating margins. Net profit came in at Rs 8,131 crore, a 10.8 per cent rise on year-on-year (YoY) basis. Revenue for the period came in at Rs 38,172 crore, up 11.4 per cent YoY while revenue growth in constant currency (CC) terms surged 10.6 per cent. Operating Margin, on the other hand, slipped 80 basis points (bps) on YoY basis to 24.2 per cent, Sequentially, the numbers narrowed by 90 bps. READ THE FULL REPORT HERE

Brokerage view

Weakness in banking, financial services and insurance (BFSI) was more pronounced, the company said. Ability to attain double-digit growth in FY20 now hinges on a crucial 2Q, as it will be tough to make up for the shortfall in a seasonally weak 2HFY20, analysts at Motilal Oswal Financial Services (MOFSL) note in the results review report.

"The certainty factor around double-digit FY20 growth has waned with hopes now pinned on 2Q, casting doubts on the traction in the near term. Margin base in the first quarter and the continued rise in subcontractor expenses hint at higher pressure on earnings growth this year. We expect USD revenue/EPS (earnings per share) CAGR (compound annual growth rate) of 9.8 per cent/9.6 per cent over FY19-21. Our price target of Rs 2,100 discounts forward earnings by 20x," the MOFSL note said.

HDFC securities, on the other hand, has maintained 'buy' rating on the stock with a target price of Rs 2,420. The brokerage believes TCS’ growth, scale and durability are its key strengths. "Growth in digital, momentum in deal wins and strong hiring trend are positive demand indicators. On the contrary, key risks include rupee appreciation, adverse macros and increase in onsite workforce crunch," HDFC Securities said.

The results were in-line with Antique Stock Broking's expectation of a moderation in revenue and EBIT growth in FY20. Even though revenues grew double digit YoY in 1QFY20, the start has been slower than expected and makes it difficult to achieve double digit CC revenue growth in FY20, said their analysts in a post result note. They maintain a 'HOLD' rating on the stock with target price of Rs 2,170, based on 22x FY21e EPS. "The stock is trading at 24.1/21.6x FY20/FY21e EPS which we believe is expensive given the moderating growth trajectory," they said in a report.