Wait for a 'beat' from TCS just got longer; foreign brokerages mixed post Q2 results

NEW DELHI: Foreign brokerages such as Goldman Sachs, Citigroup, Credit Suisse and Macquarie offered mixed outlook for India’s largest IT services exporter, TCS, after the company on Tuesday reported its September quarter numbers in line with Street estimates.

TCS revenues grew 3 per cent sequentially, 5.8 per cent year-on-year, to $4.2 billion. In rupee terms, revenues rose 5.8 per cent sequentially to Rs 27,165 crore.

This was short of analysts’ expectations and lower than that of Infosys, India's second largest IT exporter, which reported a sequential revenue growth of 6 per cent for the same quarter.



Seasonally, the September quarter used to be a slow one for most IT companies. Most brokerages have shown confidence in TCS after the September quarter numbers, and they expect the stock to top Rs 3,200 level in next 12 months, which translates into an upside of over 20 per cent from Tuesday’s closing price of Rs 2597.40.

CLSA has the most aggressive target price of Rs 3,200 on TCS for the next 12 months. The IT major reported growth and margins that were largely in line with estimates supported by higher growth in digital & IMS verticals.

The IT major has not met revenue growth expectations for the past few quarters, but still trades at a 19 per cent premium to peers, which is justified by its returns, Goldman Sachs said in a report. The global investment bank maintains a ‘buy' rating on the stock, with a target price of Rs 2,900.

The stock is not cheap compared with its peers. It is trading at 18.5 times FY17E price-to-earnings ratio. Similar to peer Infosys, the company has given positive signals by increasing its hiring guidance for the year and claiming that its order book is now 1.3 times higher than the previous peak, experts pointed out.

“As we enter the lean second half of the year, chances of a revenue beat have slimmed or the wait for a beat has just got longer,” Macquarie said in a report. The global brokerage still maintains ‘outperform’ rating on the stock.

“Weakness in Diligenta and Japan continued to pull down TCS’ revenue growth. The management expects weakness to persist over the next few quarters. Even as LatAm has recovered, severe currency headwinds persist in that geography,” the report said.

Factoring in slower second quarter revenue growth, some brokerages have slashed their dollar revenue growth forecast for FY16 to below 9 per cent. “The TCS stock is fairly priced and we have a ‘hold' rating on the stock. Lower revenue growth in September quarter and demanding CQGR lead us to cut our FY16E dollar revenue growth from 11 per cent to 8.4 per cent (required CQGR 2 per cent)," Edelweiss said in a report.

"We believe TCS' industry-leading growth will be challenged going forward and its margin levers are lower for any positive surprise. We maintain hold rating on the stock with a target price of Rs 2,480,” the report said.

Edelweiss added that the company has maintained a positive demand commentary, especially in the digital business (13.3 per cent of revenue), where it is seeing good traction.

“TCS’ hiring guidance has increased to 75,000 from 60,000 earlier. This reiterates our thesis that the sector will clock higher earnings growth than revenue growth led by productivity gains,” the report said.

Another global brokerage firm, Citigroup has downgraded the stock to 'sell' from 'neutral', and slashed its target price to Rs 2,430 from Rs 2,765 earlier.

Citi has downgraded the stock on slowing growth and high valuations, and expects slowing growth to put pressure on the earnings multiples going forward.