TCS shares slip as brokerages offer mixed outlook, reduce earning estimates

Analysts believe that the earnings were satisfactory and were in line with their estimates, with an optimistic management waiting for a turnaround in the near future

Shares of TCS fell 2.73 per cent to Rs 4,112.65 apiece on the BSE in Friday’s intraday deals after the information technology (IT) company reported modest earnings in the second quarter of the current financial year (Q2FY25).

Analysts believe that the earnings were in line with their estimates and the firm’s management is confident of better results in the near future. The confidence is based on a positive demand outlook for IT services and an improved macro environment. They expect TCS and the IT sector to grow considerably from Q4FY25 onwards.

Excluding health care and telecom, other TCS verticals grew sequentially in Q2FY25. Health care declined 3.4 per cent and telecom remained weak, said analysts at Nuvama Institutional Equities.

“Growth was primarily driven by the BSNL ramp-up. The decline in North America was surprising but this was attributable to client-specific issues in health care and persistent weakness in the communications vertical,” said analysts at Motilal Oswal Financial Services, referring to TCS’s deal to provide services to the state-run telecom company.

TCS’s business serving the banking, financial services and insurance (BFSI) sector grew 1.9 per cent quarter-on-quarter (Q-o-Q) and did particularly well in North America. Energy and utility grew 4 per cent Q-o-Q.

Spending hope

The company’s management is optimistic about Generative AI (GenAI) though the business had a subpar quarter, noting increased investments and client engagements rising to 600 in Q2FY25 (up from 275 in the first quarter). As many as 86 GenAI projects went live compared to eight in Q1.

It expects discretionary spending by clients will improve in the coming quarters, with BFSI continuing to recover, retail rebounding after a strong holiday season, and manufacturing addressing temporary supply chain issues. Additionally, investments in the travel vertical are returning.

The company’s total contract value, or deal wins, came in soft at $8.6 billion in Q2FY25 but within the management’s comfort range of $7-9 billion. Overall pipeline and qualified pipeline is at an all-time high, said Nuvama analysts.

“Management remains optimistic about demand revival as they see a recovery in BFSI and bottoming out of the retail vertical. We are cutting FY25E (estimated)/26E EPS (earnings per share) by -4.9 per cent/-3.9 per cent factoring in slightly lower growth and margins. We continue to value TCS at 30x Sep-26E PE. Maintain ‘buy’ with a revised target price of Rs 5,100 (earlier Rs 5,250),” said Vibhor Singhal, Nikhil Choudhary, and Yukti Khemani, analysts at Nuvama, in a result review note.

Mixed forecast

Analysts at Nomura highlighted positives for the IT sector, like the likely onset of an interest rate-cutting cycle and a potential thaw in decision-making by companies in the United States after elections that may provide fillip to demand.

Nomura expected TCS to have a revenue growth of 6.3-7.5 per cent year-on-year in FY25-26F (compared to 4.1 per cent in FY24) if there is an improvement in deal wins. (‘F’ is forecasted)

Analysts at Emkay disagreed, saying that weak discretionary spending and clients’ cautious behaviour amid macro uncertainties weighed on revenue growth of the company in the Q2FY25.

The brokerage firm reduced its earnings estimates for TCS by 1.2-2.4 per cent for FY25-27, citing the Q2 miss. Nomura cut its EPS estimate by 1.6 per cent and 2.4 per cent for FY25 and FY26F, respectively, driven largely by margin cut.

“Given the lack of any near-term trigger, we retain ‘reduce’ with a target of Rs 4,500/sh at 28x Sep-25E EPS,” said Emkay.

Most global brokerages are bullish on TCS for the long term, highlighting the company’s steady hiring trends and continued recovery in BFSI. Jeffries maintained its ‘buy’ rating on the stock with a 12-month target price of Rs 4,735.

JP Morgan analysts maintained their overweight stance on TCS’s stock with a target of Rs 5,100. Japanese brokerage firm Nomura gave a ‘neutral’ call on the stock with a target of Rs 4,150.

At close, the TCS stock slipped 1.84 per cent at Rs 4,150.60 per share. In comparison, the BSE Sensex fell 0.28 per cent at 81,381.36 level.