Elevated valuations make brokerages go cautious on TCS

TCS shares declined 3.10 per cent on Friday on concerns that growth is not strong enough to justify valuations. TCS declined for the third straight day eroding nearly Rs 61,000 crore of investors’ wealth in the period.

The software major announced its September quarter results on Thursday reporting a 23 per cent rise in profits at Rs 7,901 crore compared with Rs 6,646 crore it reported for the corresponding quarter last year.

Most analysts turned cautious on the stock citing elevated valuations.

“Stock valuations already imply consistent double-digit growth, an aggressive assumption, leaving nothing on the table,” said Kawaljeet Saluja, analyst, Kotak Securities. “TCS requires a mix of strong demand across verticals and mega deals to support current valuations and generate 11 per cent annual return.”

The stock, which has fetched 50 per cent so far this year, is currently trading at 23.6 times FY19 estimated earnings. Brokerages such as Goldman Sachs, Macquarie, BNP Paribas, Jefferies and ICICI Securities have cut their target price on TCS post September quarter results.

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“While currency on the one hand provides a boost to the earnings, the events globally may still likely offset the same by keeping the valuation multiple, and hence the upside, in check,” said Gautam Duggad, head of research, Motilal Oswal Securities. “Best-in-class execution and visibility of revenue momentum will continue driving premium valuations for TCS, but at the same time potential macro headwinds will keep expansion of the same in check.”

CLSA said that margin expansion is slightly lower as TCS invests to exploit demand while Nomura expects marginal downside to growth numbers.

Source: Economic Times