Buzzing Stock: Emkay Global has sell rating on TCS, target Rs 1,520

Emkay Global has given a sell rating to Tata Consultancy Services (TCS) with a reduced target price of Rs 1,520 over 12 months. The brokerage has reduced FY21/22E EPS by 4%/3%, driven by changes in revenue growth assumptions. It has maintained a sell rating on the software company and cut target price to Rs1,520 from Rs 1,560 earlier, on an unchanged target P/E of 16 times. It has built in a year on year (YoY) decline in FY21 on a full-year basis with some improvement in growth prospects from the second half of FY21 onward.

The software company’s share price moved up by 7.52 per cent from its previous close of Rs 1716.05. The last traded price is Rs 1845.15. Incorporated in 1995, TCS has a market cap of Rs 643759.12 crore.

Investment Rationale


The brokerage liked the strong order booking at $8.9 billion, led by the closure of large deals with Walgreens and Standard Life plus the margins holding up well despite revenue growth pressure.

The brokerage did not like the 1.2% sequential revenue decline in the March’20 quarter itself and the fact that the management expects further pressure in the near term.

The company continues to aspire for 26-28% EBIT margins for the medium term although Covid-19-related challenges will mean that EBIT margins will likely remain significantly below the guided range for the 5th year in a row in FY21. The brokerage cut FY21/22E EPS by 4%/3% to Rs 83/95, driven by a slight reduction in revenue estimates. It also introduced FY23E EPS at Rs103.3. Overall recessionary pressures are likely to result in a significant hit to TCS as well, notwithstanding its strong execution and relative positioning with clients.

Financials

TCS reported weak fourth quarter (Q4) results, with -1.2% QoQ/+3% YoY cc revenue growth (vs. Emkay estimates of 0.3%/0.5% QoQ cc growth). However, EBIT margins were better, supported by a significant reduction in other costs (down 60bps QoQ) that led to an improvement in gross margins as well. Order booking was solid at $8.9 billion, aided by large deal bookings in the earlier part of the quarter although management indicated about demand-supply side challenges due to Covid-19 in the recent weeks.