TCS Chief executive and managing director on an analyst call said that FY22 would be an aberration from a revenue growth perspective. The shares of information technology major of Tata Consultancy Services (TCS) tumbled 5.1 percent to Rs 3,074.55 apiece on the BSE in the intra-day deals on Tuesday and were trading worst-performing counter on the 30-share BSE barometer as investors booked profit after an in-line result. The counter ended 4.2 percent lower on the BSE at Rs 3,105 levels, as compared to a 1.4 percent rise in the S&P BSE Sensex.
TCS shares are about 45% higher than their pre covid highs of February 2020. In covid year fiscal year 2020-21, the company’s revenue declined 0.8% in constant currency terms.
On Monday, India’s largest IT services player reported a robust set of numbers for its fourth quarter of FY21, as clients continued to spend on digital services and focused on reimagining their business operations. The biggest takeaway from the Q4 numbers was the order book at $9.2 billion, the highest-ever reported by TCS in a quarter since the company started writing this metric.
TCS’s net profit was up 14.9 percent at Rs 9,246 crore year-on-year and 6.2 percent quarter-on-quarter (QoQ). Revenue, meanwhile, grew 5.9 percent YoY and 4.2 percent QoQ at Rs 43,705 crore.
For the full year, the company reported revenue of about Rs 1.65 trillion, up 4.6 percent, but on a constant currency basis, revenue was down 0.8 percent.
Commenting on the performance, Rajesh Gopinathan, chief executive officer and managing director, TCS, said the company entered FY22 more confidently and with better visibility. “As I have stated in the past, growth is being led by core transformation opportunities such as cloud migration, application transformation, and digital services. Our focus going into FY 22 will be to engage with clients in their growth plan, propelled by innovation and leverage of collective knowledge,”
The results, however, elicited mixed responses from analysts as they fear that despite a strong earnings show, the stock is trading at premium valuations and has factored in most of the positives. Therefore, the stock price may have limited upside from here on.
Sudheer Guntupalli and Hardik Sanghani, research analysts at ICICI Securities, have downgraded the stock from ‘Add’ to ‘Hold’ as they believe the industry growth is unlikely to witness a meaningful acceleration (vs. pre-Covid) over the medium term as is expected by the street. Moreover, given the excellent pace of vaccination in core markets like the US / UK, the potential resumption of costs related to marketing events / onsite travel (in H2FY22) is a crucial thing to watch out for.
“As we rebase our exchange rate estimates (now INR/$ = 75/76 for FY22/FY23E), FY22E EPS witnesses around 5 percent upgrade even as FY23E EPS remains largely stable. We downgrade the stock to HOLD (from ADD earlier) with an unchanged target price of Rs 3,350 (implying 30x FY23E EPS),” they said in a result review report.
That said, in the context of the 2nd wave in India, they expect TCS to command relative investor interest given low / no disruption to IT and perception of the stock as a cash proxy during heavy market volatility.
However, those at Kotak Institutional Equities maintain a ‘Reduce’ rating on the stock due to its expensive valuations. “At 27.4X FY2023E, the upside is limited. We maintain our REDUCE rating. Our EPS increases by 2-3 percent due to a change in INR/USD assumptions by KIE’s economist. The fair value increases to Rs 3,250 due to roll over and after baking in EPS revision,” they said in a report.
Globally, foreign brokerage Citi has a ‘Sell’ call as valuations at 31x 1yr forward (2-SD above mean) is pricing-in positives. On the other hand, Nomura has a ‘Neutral’ rating on the scrip, and they suggest investors await a better entry point.
That said, Credit Suisse (Outperform; TP: Rs 3,750), CLSA (Outperform; TP: Rs 3,370), Goldman Sachs (Buy; TP: Rs 3,646), and Macquarie (Outperform; TP: Rs 3,640) remain positive on the stock as they believe the sector has entered technology upcycle where TCS may continue to deliver industry-leading growth.
“TCS is on track for double-digit growth for FY22 and remains well-positioned to benefit from 3 key spending themes: cloud transformation, customer experience, & core modernization,” brokerage firm Macquarie said in its result review report.
However, with the company’s shares have risen far ahead of its pre covid peak and valuations of more than 30 times one year forward earnings, investors are banking on high growth for some time to come.