TCS slips over 3% on Q4 earnings; Nomura maintains buy rating

Though the revenues came in as a disappointment, Nomura says, the results were in line with expectations on margins and ahead on PAT

TCS is witnessing selling pressure this morning after the company reported a net profit of Rs 3,858 crore for the March quarter, down 27% year-on-year (y-o-y) and 29% quarter-on-quarter (q-o-q).

The stock was quoting at Rs 2,500 levels, weaker by around Rs 85 or 3.2%, on the BSE at 9:40AM. The results were announced post market hours on Thursday.

The net profit was impacted by a one-time bonus payment, currency headwinds and weakness in verticals such as telecom, energy and insurance. After adjusting for one time special employee reward of Rs 2,628 crore announced by the company, the consolidated net profit dropped 30.31% to Rs 3,713 crore in Q4 March 2015 over Q3 December 2014.

“The results were slightly below expectations on the revenue front. The higher-than-expected headwinds in energy, insurance and telecom verticals led to this miss. However, other verticals are expected to continue doing well and should contribute to growth in FY16 and beyond. Operating margins were in line with expectations and we expect the company to maintain margins in the stated 26%-28% band, going ahead,” said Dipen Shah, head of Private Client Group (PCG) research at Kotak Securities.

According to analysts at Nomura, TCS’s 4QFY15 quarter results were below expectations on revenue growth (1.6% q-o-q in constant currency terms versus their estimate of 2.5% q-o-q), but in line with expectations on margins and ahead on PAT (profit after tax), driven by higher-than-anticipated forex gains.

Though Nomura expects the stock to react negatively to the weaker-than-anticipated growth on already toned-down expectations at the pre-results analyst briefing, it has maintained a 'buy' rating on the stock with a target price of Rs 2,845.

Manik Taneja, an analyst tracking the company with Emkay Global has also maintained an 'accumulate' rating on the stock with a target price of 2,730.

"While TCS has continued to miss the high expectations through recent quarters, TCS’s premium valuations in the sector should sustain given it’s strong positioning across key verticals/regions/clients. HCL Technologies, Infosys and TCS remains our order of preference," he said.

Analysts at Barclays also continue to assume a stable demand scenario for FY16 in which TCS' strength in execution should lead to industry leading revenue growth. "We retain our overweight rating as we raise our 12-month price target to Rs 2,975," they said in a report.