TCS extends gains into third day, hits three-month high ahead of AGM

Shares of Tata Consultancy Services (TCS) extended their gains into third straight day and hit a three-month high of Rs 2,127, up 2.5 per cent, on the BSE on Wednesday ahead of the company’s scheduled annual general meeting (AGM) on June 11, 2020.

The stock was trading at its highest level since March 6, 2020. Thus far in the month of June, it has rallied 8 per cent, as compared to 7 per cent rise in the S&P BSE Sensex. The stock has recovered 41 per cent from its March low of Rs 1,504. It hit a 52-week high of Rs 2,296 on September 3, 2019.

Analysts at Prabhudas Lilladher believe that cut in discretionary spending, project deferrals, delay in deal closures, delay in deal ramp-up, pricing pressure & bankruptcies in select verticals (Retail, E&U, travel) will severely impact revenue growth for the information technology (IT) sector ahead. Margins will likely face strong headwinds from utilization drop, pricing cuts and revenue decline.

For the April-June quarter (Q1FY21), the brokerage firm expects TCS tp report sharp sequential revenue decline. All verticals, they say, will be impacted simultaneouly unlike global financial crisis where the impact spread from the financial vertical to others. Recovery in growth and margins will be challenging and can take 3-4 quarters. TCS indicated that 80 per cent of the impact in Q1FY21 will be demand related while 20 per cent impact will be from supply constraints. 

"TCS expects some level of impact from supply constraints in May and June as all contracts/services are not amenable to work from home (WFH). Demand recovery, new growth opportunities in demand and market share gains will help TCS overcome the challenge of declining revenues in 2HFY21. We believe that strong client franchise of TCS will help the company mitigate the threat of client bankruptcies better than peers," analysts at the brokerage said.

“TCS has a historical track record of adapting to multiple business challenges and technology change cycles. In addition, it has consistently maintained its market leadership, best-in-class operational metrics and high return ratios. The Covid-19 pandemic is expected to pose continued near-term challenges on demand, supply, pricing and working capital fronts. Nevertheless, we expect the company to be relatively better positioned (v/s the sector) to navigate these challenges,” Motilal Oswal Financial Services said in Q4FY20 results update.