TCS trades weak on disappointing Q1 EBIT margins

The stock dipped nearly 3% to Rs 2,376 on BSE in intra-day trade

Tata Consultancy Services (TCS) dipped nearly 3% to Rs 2,376 on BSE in intra-day trade after the company’s EBIT (earnings before interest and tax) margins in June quarter (Q1FY18) declined to 23.4%, down 230bps QoQ and 170bps YoY. The fall in EBIT margins was attributed to wage hike and INR appreciation.

The consolidated net profit for the quarter was down by 10% QoQ to Rs 5945 crore, the fall was also partly attributed to lower other income down 5.8% QoQ, on account of lower forex gains.

Analysts on an average had expected profit of Rs 6,225 crore for the quarter.

“Given the uncertainties in the demand environment owing to industry transition phase, regulatory overhang in US and modest earnings growth over FY17-19E (4.8% CAGR), Hence we do not see any positive triggers to upgrade in our rating or price target,” analyst at Sharekhan said in stock update.

Nevertheless, company’s policy of strong excess cash payout and increasing free cash flow (FCF) yield will support valuation multiple limiting major downside, as street is already factoring a weak FY2018E. We maintain our Hold rating on the stock with an unchanged price target of Rs 2,450, added report.

“TCS has started FY18 on a decent note but a lot will depend on the acceleration in banking and financial services (BFSI) in the ensuing quarters. We revise our FY18 USD revenue growth to 8% from 7% earlier to factor in the beat on our estimates and cross currency benefit,” analysts at Antique Stock Broking said in Q1FY18 results review.

“However, margin miss in 1QFY18 and further headwinds in the form of sustained investments in newer technologies (we like the company's approach as digital is gaining scale and it will benefit from these investments in medium to long term) and currency appreciation, we lower our FY18/ FY19 EBIT margin estimate to 24.7%/24.5% from 25.3%/25.0% earlier,” said brokerage firm, and retain ‘hold’ rating on the stock with target price of Rs 2,370.

At 10:49 am; the stock was trading 1.6% lower at Rs 2,406 on BSE, as compared to 0.36% decline in the S&P BSE Sensex. A combined 1.36 million shares changed hands on the counter on BSE and NSE so far.