TCS shares at Rs 2,600 or Rs 4,100? What brokerages said on IT stock post Q3 results

The December quarter results of Tata Consultancy Services (TCS) came largely in line with analyst estimates, but the management commentary was a bit cautious, said analysts, who sees growth constraints going ahead.  Post its quarterly results, brokerages such as Jefferies, JPMorgan, Nomura India, Morgan Stanley, Motilal Oswal Securities, Nuvama Institutional Equities, Nirmal Bang, Kotak Institutional Equities and Emkay Global, among others, have price targets on the stock that vary from Rs 2,635 to Rs 4,100.

TCS on Monday reported dollar revenues of $7.08 billion in the December quarter, which was ahead of analysts' estimates. A 50 basis points improvement in sequential Ebit margin was a tad lower than what they expected while a fall in attrition rate was in line with Street estimates. Order wins at $7.8 billion was largely in line with $7-10 billion deal wins that analysts anticipated earlier.

"Overall, the management commentary on demand environment indicates caution in the near term despite consistent growth in the deal pipeline, as North America and continental Europe see a near-term deal conversion slowdown on account of macroeconomic challenges. But, TCS reiterated its aspiration of double-digit growth in the medium to long term," said Motilal Oswal Securities, which has a target of Rs 3,810 on the stock.

The brokerage sees growth constrains over the next two quarters, "although TCS should be relatively insulated on account of its strong deal backlog," it said.

Nirmal Bang has the lowest target among a dozen brokerages at Rs 2,635. It said TCS management held out a more optimistic view on demand in the foreseeable future compared to its expectation after delivering a slightly better-than-expected performance in December quarter.

It said there is going to be a push-back on pricing, one moves into FY24 when macro conditions will be much more challenging than FY23.

"Q3FY23 net headcount was lower by 2,200. Not entirely unexpected, but TCS says that it is not a leading indicator of weaker demand. Overall, we felt that TCS commentary was pointing to a high single-digit CC revenue growth in FY24 compared to the teen growth seen in both FY22/FY23 and seems to be implying a soft-landing macro situation in the US in 2023," it said as it anticipates revenue growth in the low-to-mid single digit, with margins not expanding in FY24 due to pricing pressure and normalisation of certain costs.

Nomura India said TCS saw a modest revenue beat, but margin miss in December quarter. This brokerage has target of Rs 2850 on the stock. 

Emkay Global said the management remained watchful in the near term, considering heightened macro uncertainties but reiterated confidence on accelerating revenue growth, once uncertainties abate. This brokerage has tweaked its earnings estimates for FY23-25 post the Q3 performance, TCS, it said, is well placed to navigate the challenging demand environment, considering its well-diversified offerings across growth & transformation and cost takeout & efficiency projects.

"But this seems to be largely captured in the valuation, in our view. We retain HOLD with TP of Rs 3,200/share at 22 times Dec-24E EPS," it said.

Nuvama, which has the highest price target of Rs 4,100 said, it finds TCS valuations being no longer expensive, making the risk-reward profile attractive. 

"We see strong sustainable demand driving revenue growth and margins tailwinds aiding higher earnings growth over the next three years," it said.

The IT major had on Monday reported a 11 per cent year-on-year (YoY) rise in profit at Rs 10,846 crore for the December quarter compared with Rs 9,769 crore in the corresponding quarter last year.  Revenues for the quarter jumped 19.10 per cent YoY to Rs 58,229 crore from Rs 48,885 crore in the same quarter last year. On constant currency terms, revenues were up 13.5 per cent YoY. 

Order book for the quarter stood at $7.8 billion, the major said, adding that book-to-bill was at 1.1 times. Net headcount declined 2,197 while the total workforce strength stood at 6,13,974, TCS said.  In the last twelve months, IT Services attrition rate stood at 21.3 per cent, the IT major said on Monday.

Also Read: Mrs Bectors Food, IDBI Bank, PNB Infratech: Trading strategies for these 3 stocks