Tata Consultancy Services shares fall post Q4 results. Here’s what analysts say

Tata Consultancy Services shares dropped nearly 2% in opening trade on Thursday after the IT major reported mixed financial results for the fourth quarter that ended March 31, 2022. Most analysts that track TCS have kept their ratings unchanged after the Tata group company missed Dalal Street’s estimates for the March quarter due to soft revenue growth in the backdrop of a pause in discretionary spending. TCS shares have an average price target of ₹3,694, as per Trendlyne data, an upside potential of 14% from Wednesday’s closing price.

Tata Consultancy Services (TCS) experienced a 1% drop in share price to ₹3,210.05 at the opening of the BSE due to the Q4 results. This is lower than the previous day’s closing price of ₹3,242.10. In the initial trade, the company’s shares fell by 1.8% to ₹3,183.15, which led to a decrease in market capitalization to ₹11.71 lakh crore. On April 13, 2022, the company’s shares reached a 52-week high of ₹3,710.05, while it hit a 52-week low of ₹2,926 on September 26, 2022.

The BSE IT index was the weakest performer on the sectoral front, with a decline of 1.2%, caused by LTIMindtree, HCL Technologies, Infosys, Tech Mahindra, and TCS. Infosys experienced a nearly 2% reduction in share price during the opening trade as investors became apprehensive before the release of their Q4 earnings.

TCS, the second most valuable company in India by market capitalization, has performed worse than the BSE Sensex over the past year, delivering a negative return of 12.5% compared to the benchmark’s 3.5% growth. However, in comparison, the BSE Information Technology index fell almost 18% during the same period. TCS shares have gained over 3% in the last six months but fell nearly 2.5% in the last month. In 2023, TCS shares lost nearly 2%, with a dip of 1% in a week.

TCS recently released its financial performance report for the March quarter of 2022-23. The company reported a consolidated PAT of ₹11,392 crore, up 14.8% YoY and 5% sequentially, which was slightly lower than the average estimate of ₹11,530 crore. Revenue rose 16.9% YoY to ₹59,162 crore, and the company’s operating margin for Q4 FY23 stood at 24.5%, while the net margin was 19.3%. The board of TCS also declared a final dividend of ₹24 per equity share for the fiscal year and has paid three interim dividends so far in FY23, aggregating to ₹91 per share.

ICICI Securities has maintained a “BUY” rating on Tata Consultancy Services (TCS), the Indian multinational IT services and consulting company, with a target price of INR3,786 ($50.16) for the next 12 months, representing an estimated 17% potential upside from the current market price. ICICI Securities believes that TCS is a defensive stock in the current economic climate and is gaining market share by winning cost optimization deals. The brokerage noted that TCS posted a strong deal Total Contract Value (TCV) during Q4FY23. ICICI Securities also believes that TCS will be a strong beneficiary of the pick-up in demand in FY25E as postponed discretionary projects start getting executed.

However, the negative sentiment in the banking, financial services, and insurance (BFSI) sector remain a key risk for the company, and this could impact other industry verticals such as retail and hi-tech. ICICI Securities has cut FY24E-FY26E earnings per share (EPS) estimates by 1-2% while retaining revenue growth forecasts of 7%/11%/12% for FY24E/FY25E/FY26E respectively in constant currency (CC) terms. The forecast is based on the assumption that there will be no recession in the US or globally in the near to medium term.

Another brokerage, Axis Securities, said that TCS’ Q4 revenue stood slightly below expectations and showed a QoQ growth of 1.6%. EBIT margins remained flat at 24.5% QoQ, and net profit for the quarter stood at INR11,392 crore ($1.51bn), reporting a YoY revenue growth of 14.8%. Axis Securities’ Senior Research Analyst, Omkar Tanksale, noted that growth in Q4 was led by Retail and Consumer Packaged Goods (+13%) and Life Sciences and Healthcare (+12.3%). However, other verticals such as Technology Services, BFSI, Manufacturing, and Communications & Media reported single-digit growth. TCS posted an all-time high of $10bn in Q4 FY23, and total deal wins for FY23 stood at $34.1bn.

SAMCO Securities said that TCS reported a muted quarter, with a mixed bag of numbers. The growth was subdued, with the BFSI segment reporting single-digit growth and ending the year lower than expected. The company was not able to sustain its margins, and for FY23, there was a decline of around 200 bps. However, the order book of $10bn is at an all-time high, indicating optimism about growth in the IT sector. With the substantial decline in the attrition rate, operational costs optimized, and the order book remains strong, it remains to be seen how FY24 will pan out, said Urmi Shah, Research Analyst at SAMCO Securities.