TCS up 36% in last 1yr; how to trade the stock ahead of its Q4 result today

Tata Consultancy Services is scheduled to report its earnings for the quarter-ended March 31 post market hours on Thursday. All eyes are on India’s largest IT exporter after Infosys Q4 numbers failed to lift investor sentiment.

The stock has been an outperformer, rallying as much as 36 percent from Q4 FY17 to Q4 FY18 compared to a 16 percent rally seen in the Sensex, which is a bullish sign. The stock picked up momentum post its December quarter result and rallied during the second half of January to register a new high at Rs 3,259.05 on January 24.

However, the stock witnessed a corrective phase post that which lasted for a couple of months during which prices retraced 61.8% of its previous upmove. “During the last week of March, the stock resumed its uptrend along with peers after forming a strong base around the retracement level of Rs 2,781. This was followed by a sharp rally in the last few weeks and the stock is currently trading near its January high ahead of its Q4 results,” Ruchit Jain, Technical Analyst at Angel Broking, said.

Most analysts expect TCS to report between 1.1 percent and 2 percent revenue growth in constant currency terms, sequentially, helped by some of its recent large deal wins including Marks & Spencer and life insurance provider Transamerica. Growth will be aided by the ramp-up in some of these deals. In terms of margin outlook, the management had stated last year that it expects margins to remain between 26 percent and 28 percent. In the quarter-ended December 31, the company reported an operating margin of 25.2 percent.

The way this counter clawed back from the recent lows of Rs 2,781 in just three weeks, post the multi-week correction witnessed from the high of Rs 3,259, suggests that the bulls have a long way to go. “Once this counter registers a fresh breakout above its recent life-time highs of Rs 3,259, it can head much higher towards around Rs 3,550 levels,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in said.

Post result, if the support of Rs 3,100 holds, then investors can initiate fresh buying with a stop below Rs 3,100 on a closing basis, he added.

“Due to result day related volatility, if this counter witnesses a big sell-off towards Rs 3,000 levels, then this should also be considered as an opportunity to create fresh longs with a stop loss below Rs 2,900 levels on a closing basis as the long-term trend is still intact.”

Traders usually like to trade stocks ahead and on the day of their results. For TCS, volumes traded on both exchanges on its result day are much higher than its average traded volume.

Soumen Chatterjee, HoR, Guiness Securities, said TCS had announced its Q3 results on January 12 and the stock did not witness large price fluctuations though traded volumes were higher. “However, when TCS announced its Q2 results on October 12 last year, the counter saw price action with large volumes.”

He highlighted that when the company announced its Q4 result on the same date last year, huge price action was missing throughout the day. Unlike other IT counterparts, TCS is not that volatile on D-day since it is more of an investor-friendly stock which has amassed significant returns over a given period of time, Chatterjee concluded.

TCS is trading at premium valuations over its peers due to industry leading return on equity and operating margin. Analysts advise investors to adopt a buy on dips strategy going forward.

Mustafa Nadeem, CEO, Epic Research, suggests using dips since the stock has recently come out of a consolidation phase after almost 36 months and can continue its primary bullish trend. “The flag formation on the daily chart suggests consolidation in the very short-term is to be utilised for an upside momentum that can take the stock higher to unchartered territory. The price can extend the momentum based on the previous consolidation where it made a short-term base,” he said. Nadeem expects the stock to test Rs 3,400 in the short term. Over a year’s time, he sees the stock appreciate 15% to Rs 3,560 from current levels.

Strategies to be deployed ahead of its Q4 results:

The broader trend for the stock remains positive. Stock prices have already rallied more than 10% in April. Hence, the risk-reward ratio for creating fresh long positions does not seem to be that favourable as compared to a few days back. We are advising traders to adopt a buy on dips strategy. One can look to enter the stock on dips in the Rs 3,000-3,050 range. From a medium-term perspective, we expect the stock to continue its outperformance and anticipate a target of around Rs 3,350-3,400.

Investors can deploy a Covered Call strategy. Buy TCS futures around Rs 3,155-3,160 with a stop loss below Rs 3,130 and sell 3200CE at Rs 47-48. TCS is trading at premium valuations over its peers due to Industry-leading RoE and operating margin. It is trading at a P/E of 24 times versus 19 times for its peers and an EV/EBITDA of 19.9 times versus an industry average of 15 times.

The stock is in consolidation mode, post breaking out above the psychological Rs 3,000 mark. However, MACD is in buying mode whereas directional movement indicator is in positive momentum. Traders can ‘accumulate’ TCS in their core portfolio and review the stock post quarterly earnings.

As per price pattern, we expect the stock to test Rs 3,400 in the short-term. In a year’s time, the stock can appreciate 15% to Rs 3,560 from current levels.

Technically, the stock is already trading at the upper end of the range. Patterns of exhaustion like a Doji/Spike is evident, which indicates that upside should remain limited to Rs 3,200-3,250. Options data also indicates a stiff resistance at Rs 3,200 with a huge Call OI. Investors can look to book profit in longs as there is little to earn while supports are placed lower. A right re-entry point could be below Rs 3,000-2,950 in a correction.

Short Straddle: Sell 3,150CE and 3,150PE | Combined premium: Rs 116 | Target: Rs 65 | Stop loss: Rs 140

Short Strangle: Sell 3300CE and 3000PE | Combined premium: Rs 33 | Target: 13 | Stop loss: Rs 43