TCS down 1% as June quarter earnings miss Street expectation

Shares of Tata Consultancy Services (TCS) sliped 1.4 per cent at Rs 3,212 on the BSE in intra-day trade on Friday, after the company’s June quarter (Q1FY22) earnings missed the Street expectation as its India business pulled down revenue growth during the first quarter of FY22.

The stock of information technology (IT) major was trading 0.85 per cent lower at Rs 3,229 at 09:32 am, marginally recouping the morning loss. It had hit a high of Rs 3,274 in opening trade. In comparison, the S&P BSE Sensex was down 0.41 per cent and the S&P BSE IT index lost 0.10 per cent on the BSE.

TCS reported 2.4 per cent quarter on quarter (QoQ) rise in dollar revenue in constant currency (CC) terms for Q1FY22. Revenues in the quarter were impacted by 14.1 per cent QoQ decline in India revenues (impacted by Covid).

Excluding the impact in regional markets, core business growth of 4.1 per cent QoQ CC was broadly in-line. The EBIT (earnings before interest tax) margin at 25.5 per cent declined 130 basis points (bp) QoQ, primarily due to annual wage hikes (170bp impact).

"Over FY21-24, we now expect TCS to deliver 13% earnings CAGR. The lack of positive surprises in Q1FY22 results along with TCS' premium valuations does not bode well for stock performance. We cut our price terget to Rs 3,550/share based on 31x PE and maintain Hold rating," wrote analysts at Jefferies in a post-result note.

Financial performance

For the first quarter, net profit of the company at Rs 9,008 crore grew by 28.5 per cent year-on-year basis, but was down 2.5 per cent sequentially. Revenue for the quarter grew 18.5 per cent year-on-year at Rs 45,411 crore, and was up 3.9 per cent sequentially. According to Bloomberg poll, analysts were estimating revenue of Rs 45,767.5 crore and net profit of Rs 9,391.9 crore for the quarter gone by.

On the operational front, the company continued to see a robust growth. For the quarter, TCS reported a total contract value of $8.1 billion. The deal signing has been driven by growth across geographies and verticals.

“Healthy deal wins and robust hiring points to higher growth in coming years. Going forward, we expect the win momentum to continue. This, coupled with improving trend of cloud migration and business transformation is expected to play a critical role in driving multi-year technology growth,” ICICI Securities said in a note.

Considering TCS’ digital prowess coupled with market share gains via vendor consolidation, captive carve outs and increase in outsourcing we expect TCS to register robust growth in revenues in coming years, the brokerage firm said.

“IT Services has entered into a technology upcycle, with cloud- and data-driven deals coming into the market. Given TCS’ size, capabilities, and portfolio stretch, it is rightly positioned to leverage expected industry growth. The company has consistently maintained its market leadership and shown best in-class execution. This gives the company continued room to increase its margin, while demonstrating industry-leading return ratios,” Motilal Oswal Securities said in result update.

"As disappointments (on consensus earnings) related to this continues, the current lifetime-high multiples (30x FY23E EPS) are unlikely to sustain. We downgrade the stock to REDUCE (from Hold earlier)," the ICICI Securities note adds.