TCS falls 3% on expensive valuations

Multiple brokerages have downgraded the stock owing to expensive valuations after posting better than expected earnings. (Mint) (Mint)Premium
Multiple brokerages have downgraded the stock owing to expensive valuations after posting better than expected earnings. (Mint) (Mint)
 2 min read . Updated: 13 Apr 2021, 10:43 AM IST Ravindra N. Sonavane

MUMBAI: Tata Consultancy Services Ltd's stock fell nearly 3% on Tuesday as analysts maintained a lower rating on it owing to expensive valuations. The company posted better-than-expected earnings on Monday.

The stock fell as much as 3.5% to hit a low of ₹3,143 a share. At 10.15am, the stock was trading at ₹3,143.80 on BSE, down 3% from its previous close.

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Brokerage firm ICICI Securities has downgraded the stock to 'hold' from 'add' and maintained its target price to ₹3,350 a share. Kotak Institutional Equities has maintained its reduce rating with target price at ₹3,250 a share. Dolat Analysis & Research has maintained reduce rating and with target price of ₹3,370, while Antique Stock Broking has maintained hold rating and increased its target price to ₹3,500 from ₹3,400 a share.

Constant currency growth was at 4.2% led by sustained traction in manufacturing (3.4% quarter-on-quarter or q-o-q), and retail (4%), stability in financial services (2% q-o-q excluding the two acquisitions), communications slowed marginally (3.4% q-o-q). Organic revenue growth of 2.6% (q-o-q) was more or less in-line with pre-covid growth rates for the March quarter.

Margins improved by 20 basis points q-o-q to 26.8%, tad better than analysts' expectation of flat margins.

"TCS’s results were broadly in line with street expectations on growth & margins and failed to excite as was seen through the prior two quarters. Record order booking and strong hiring keep the promise alive on FY22E rebound but 4QFY21 result print will limit case for revenue/EPS upgrades for TCS. That itself may be a case for slight disappointment given the general expectations going into the results," said JM Financial in a note to its investors.

"We tweak our FY22/23E a tad to ₹108/117.4 (as we broadly retain our growth/margin estimates) and roll forward target price (TP) to June’23E (V/s Mar’23E earlier). Hold stays with a revised TP of ₹3,050 (v/s ₹2,950 earlier), based on an unchanged 25x P/E," JM Financial added.

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Deal wins were at an all-time high at $9.2 billion compared to $6.8 billion in Q3 and $7.3 billion for the last eight-quarter average. The company's deal pipeline remains strong and evenly distributed with a mix of both small and large deals, unlike previous quarters which were dominated by small deals.

"FY2022E will be a year characterized by the war for talent which will result in elevated compensation revision. TCS’ consistent people practices, timely onboarding of freshers, timely and predictable compensation revisions and tools for skilling and training holds in good stead and cushions inflationary impact," said Kotak Institutional Equities in a note to its investors.

"In our view, TCS is well positioned to capture both outsourcing and growth and transformation opportunities courtesy full-service model, presence across technology and domain areas, proven capability in shaping and winning mega deals, mature set of products and platforms and best-in-class execution. However, the challenge continues to be one of expensive valuations. At 27.4X FY2023E, upside is limited," Kotak Institutional Equities added.

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