TCS Q1 review: Analysts eye revival; cheap valuation to aid stock rally

TCS Q1 review: According to brokerages, the revenue led beat to estimates was broad based-with almost every vertical reporting sequential growth

Shares of Tata Consultancy Services (TCS) zoomed 2.86 per cent at Rs 4,034.90 per share on the BSE in Friday’s early morning trade. This came after the IT services major reported a 8.7 per cent year-on-year (Y-o-Y) increase in its net profits to Rs 12,040 in the April-June quarter of fiscal year 2024-25 (Q1FY25). However, the profits dipped by 3.1 per cent sequentially.

Revenues soared 5.4 per cent Y-o-Y and 2.2 per cent sequentially to Rs 62,613 crore. The topline and the bottomline marginally defeated Bloomberg estimates which had estimated revenue to be at Rs 62,128 crore and profit at Rs 11,959 crore.

According to brokerages, the revenue led beat to estimates was broad based–with almost every vertical reporting sequential growth. BFSI and retail recovered smartly while manufacturing, healthcare and energy continued their growth momentum.

Despite broad based revenue growth, deal wins in the quarter remained modest dragged by spillover of few deals to next quarter, analysts said. TCS signed $8.3 billion total contract value (TCV) during the quarter, slipping 18.6 per cent Y-o-Y and 37 per cent sequentially. In Q4FY24, TCS had signed TCVs worth $13.2 billion. 

Though, TCS continues to see a strong pipeline even as clients continue to re-prioritise spends on cost-takeout deals, they said. 

According to those at Jefferies, TCS saw acceleration across verticals except communication and retail. Key positives from the results were the return to growth of BFSI and Hitech vertical as well as North America region - which analysts see as signs of improvement in the margins. With manufacturing and life Sciences continuing to grow as well.  

“We see the return to growth of its key verticals and net hiring at a seven-quarter high as emerging signs of revival.  We raise our revenue estimates but tweak our EPS slightly and expect 7 per cent amd 10 per cent CAGR in cc revenues and EPS, respectively over FY24-27. TCS offers value relative to Nifty as its current PE premium of 29 per cent is 1-std below its 5-year average. PE premium of 39 per cent. We upgrade to ‘Buy’ with revised target price of Rs 4,615 based on 29x PE,” analysts at Jefferies wrote in a report. 

Analysts at Nuvama Research also remained positive and reckoned that TCS management sounded upbeat expecting recovery in the US-BFSI segment and bottoming out of the retail vertical. The management, however, held back from guiding for sustainability of the momentum due to uncertain macro.

“We maintain that the earnings downgrade cycle for the sector is behind and reckon the strong deal wins of the last few quarters, shall gradually convert into revenue in coming quarters, even as US macro becomes favourable. We see TCS as a perfect large-cap proxy to play this upcycle, with its strong deal wins and robust margin performance,” Vibhor Singhal, Nikhil Choudhary, and Yukti Khemani of Nuvama wrote in a report. 

Global brokerages also mostly raised their target prices for TCS and largely gave a ‘Buy’ rating to the stock. 

Japanese brokerage firm Nomura remained ‘Neutral’ on the company, while raising the target price to Rs 3,860 per share. Others such as CLSA, UBS maintained ‘Buy’ on the stocks with raised target prices of Rs 4,007 a piece and Rs 4,600 per share respectively.

On the other hand, JP Morgan maintained its ‘Overweight’ rating on the company, raising its target price to Rs 4,600 per share with a ‘Positive’ outlook. 

Uncertainty may still linger

Despite the upward projections, broad-based revenue growth, healthy deal wins, and strong pipeline not all are convinced about the TCS led revival of the sector. As some analysts say that management’s refrain from commenting on growth sustainability, signals the near-term volatility in demand led by weakness in discretionary spending and unabated pressure of  pauses in projects by clients amid macro uncertainty. 

Considering the above factors, analysts at the domestic brokerage firm Emkay, gave a ‘Reduce’ rating on TCS, with target price of Rs 3,950 per share.

Those at Kotak Institutional Equities also hinted at uncertainty and said that the muted TCV and growth in key market segments indicate things are not rosy yet. Discretionary demand is improving in the US banking segment, but overall demand has not improved.  

However, the brokerage said that it is interesting to note that the valuations of Tier one peers have converged towards TCS, despite the more consistent growth and better return on invested capital (RoIC) profile of the latter. “It is set to be the industry leader on growth and net profit. Maintain ‘Add’ at a fair value of Rs 4,500,” analysts at KIE said. 

At 09:43 AM; the stock of the company was trading 2.67 per cent higher at Rs 4027.35 per share on the BSE. In comparison, the BSE Sensex was up by 0.38 per cent at 80,201 levels.