TCS stock falls 3%: What should investors do post Q2 earnings?

Software services company Tata Consultancy Services share price fell more than 3 percent intraday Friday amid mixed views from brokerage houses after its second quarter earnings. The stock has lost 8.5 percent in past three consecutive sessions and has corrected 15 percent in October.

Results more or less were in line with analyst expectations as profit and revenue grew by 7.6 percent each sequentially while revenue in dollar terms increased 3.2 percent and in constant currency terms 3.7 percent QoQ.

Operational performance remained strong, thanks to sharp rupee depreciation (nearly 6 percent fall against the US dollar) and absence of wage hikes during the quarter. The reported margin for the quarter was 26.5 percent against 25 percent in previous quarter.

Global investment firm CLSA retained its bullish stance on the stock with a target price of Rs 2,600, implying potential upside of 31 percent, citing strong growth in Q2 with improving outlook.

Strong revenue growth was led by improving BFSI and retail segments through the ramp-up of large deal wins. Even digital business, from which contribution to total revenue increased to 28.1 percent against 19.7 percent in same quarter last year, grew 16.5 percent sequentially and 59.8 percent year-on-year in constant currency terms.

According to CLSA, the margin expansion was slightly lower as TCS invested to exploit demand.

Macquarie has also maintained its Outperform call and has said that the stock could return 18 percent over a period of one year, though it slashed target price to Rs 2,345 from Rs 2,350 to factor in lower other income.

It feels the growth momentum has been picking up in the BFS (banking, financial and services) sector.

Jefferies, too, has a Buy call on the stock with a target price of Rs 2,300, implying potential upside of 16 percent as constant currency revenue growth was largely in-line and TCS reported operational efficiency gains of 30 bps lower despite strong growth.

“Company’s commentary remained positive with acceleration in BFSI, Retail & North America. Management looked confident of double-digit YoY growth,” it said.

While retaining Buy rating with a target price of Rs 2,500 (potental upside of 26 percent), BNP Paribas said forex could present a 90-100 bps tailwind in Q3 & lift margin to 26-28 percent.

Some brokerage houses expect fall in the stock going ahead. The first reason for downside expectations is that earnings are solid but are not enough to raise target or revise call on the stock and the second is valuations are high as the stock already rallied more than 70 percent year-to-date, which may have priced in these earnings.

Nomura has maintained Reduce rating with a target price of Rs 1,950, implying potential downside of 2 percent as it feels Q2 revenue growth was below its expectations, while margins were in line.

The Japan-based research firm expects marginal downside to growth numbers and possible tempering of multiples. It prefers HCL Technologies as only Buy.

While retaining Neutral call with a target price of Rs 1,775 (potential downside 10 percent), Credit Suisse said Q2 earnings were solid but were not enough for upward earnings revisions.

The company is well placed in digital technologies but there is no pick-up in financial services, it said, adding no concerns are seen yet around trade wars and Brexit.

Deutsche Bank has Hold rating on the stock with a target price of Rs 1,740 (potential downside 12 percent) while Citi has Sell call on the stock with a target price of Rs 1,885 (potential downside of 5 percent) as TCS reported a slightly weaker than expected Q2 earnings.

Valuations at 23x leave little room for disappointment, Citi said, adding without large deals, street may get concerned about FY20 outlook.

At 10:02 hours IST, the stock price was quoting at Rs 1,932.15, down Rs 47.60, or 2.40 percent on the BSE.

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