Market share gain or industry revival? TCS results get mixed ratings on Street

NEW DELHI: TCS missed the Street estimates in June quarter earnings, even though deal wins and the management commentary on the BFSI (banking, financial services and insurance) vertical offered a lot of hope.

Some sensed market share gain for the company in its positive outlook rather than an industry-wide demand recovery.

Analysts tracking the sector said the IT firm’s lower exposure to the healthcare vertical, which has continued to show strong traction, partly hurt revenue growth. While the company management believes the worst impact of Covid-19 is behind, variables such as pricing and working capital cycles would warrant a close watch, analysts said.

For the quarter, TCS announced order wins worth $6.9 billion, up 21 per cent year on year. This, however, included closure of large deals already being negotiated over the prior months.

CLSA said June quarter margin was a miss, but stable cash flow was a positive. The brokerage maintained its ‘outperform’ rating on the stock with a price target of Rs 2,240, but said rich valuations may limit absolute upside.

Morgan Stanley said the revenue trajectory was weak due to supply-side issues. Maintaining ‘equal-weight’ on the stock, the brokerage set a price target of Rs 2,125 on the stock.

On Friday, the stock fell 0.28 per cent to Rs 2,198 on BSE.

Accenture, Cognizant and now TCS have indicated fairly good deal momentum in June quarter despite broad economic and corporate distress, said Nirmal Bang Institutional Equities.

“We did not hear such commentary from others in our recent interactions. It is very likely that these organisations are experiencing market share gain rather than a broadbased demand recovery,” it said.

TCS said it made both pricing and payment-related concessions to some of its strategic customers in distressed sectors.

Ebit margin fell 150 basis points sequentially and 60 basis points YoY to 23.6 per cent. Analysts were largely expecting the Ebit margin in excess of 24 per cent.

Overall, the largest IT firm reported 13.81 per cent year-on-year (YoY) fall in profit at Rs 7,008 crore. Analysts in an ET NOW poll had estimated the figure at Rs 7,680 crore. Consolidated revenue inched 0.39 per cent up on a yearly basis to Rs 38,322 crore. In constant currency terms, revenues fell 6.3 per cent year on year.

Among the verticals, BFSI revenue decline was restricted to 2.1 per cent sequentially in dollar terms, which surprised analysts. TCS indicated that demand in the BFSI vertical was more resilient than expected.

At 31.3 per cent revenue share, the vertical is critical to the fortunes of TCS and the industry, analysts said.

Kotak Institutional Equities said while there are a few bright spots, evidence is not comprehensive to support the thesis of long-term accelerated growth in IT spending. It finds TCS valuations ‘punchy’ at 23 times FY2022 EPS, leading it to maintain a ‘reduce’ rating on the stock.

The TCS management said that it can match December quarter 2019 rupee revenues in December 2020 quarter and should achieve flattish revenues in constant currency terms YoY by March 2021.

“The management’s confidence may be based on strong signings and deal pipeline, although the steep hurdle rate/ask for the next 2-3 quarters may make this intent difficult to achieve,” Kotak said.

Motilal Oswal Securities remained ‘neutral’ on the stock, but said it was positive on the stock. Emkay Global had a ‘sell’ rating with a price target of Rs 1,750. HDFC Securities maintained a 'reduce' stance.

“Valuations more than adequately factored in the recovery trajectory, although improving near-term visibility could keep the stock price elevated,” said HDFC Securities.

“Despite our cautious stance on the sector for many years, we have always held TCS as the industry benchmark. It has a strong position in the industry through breadth and depth of service lines, geographies and verticals. TCS has the ability to stitch together integrated offerings, significant lead in automation skills and strong delivery capabilities,” Nirmal Bang Institutional Equities said.