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TCS stock: Should investors buy or sell after Q1 results? – Economic Times

Already reeling under pressure from FII selling, the Q1 report card of India’s largest IT exporter (TCS) left investors worried over margin compression amid salary hikes and moderation of growth in Europe. Ambit’s target price of Rs 2,865 on hints at the possibility of a drawdown of up to 12 per cent while ‘ bullish target of Rs 5,000 hints at a 53 per cent rally.

All Nifty IT stocks have eroded wealth in double digits so far in 2022. Out of them, TCS, with a YTD drop of 12.65 per cent, is the best performer.

Analysts at Ambit Capital said although TCS’s revenue growth of 3.5 per cent QoQ in constant currency terms was in line, margins missed materially and headline commentary was unchanged.

It spotted three signs of weakening demand:

1) Caution on Europe on weaker macro, with the possibility of Pramerica/Postbank deal rampdowns,


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2) LTM deal wins up just 6% YoY, with deal wins remaining in $7- 9bn range, implying sub-2% growth (at higher-end) in FY23E and

3) Headcount growth at 2.4%, slowest since 2QFY21.

In its concall, the management commentary on the demand environment and deal pipeline remained intact with no visible impact of weakening macro environment, although they remain watchful. TCS indicated that the US will do better than Europe, due to client concerns over slowdown.

Domestic brokerage

, which has a target price of Rs 3,730 (up 14 per cent from Friday’s closing price), said this is an initial sign of industry commentary turning more realistic vs the current view of no impact on tech spends. “We are factoring in TCS revenue growth of 10.2% YoY in CC terms in FY23 (vs 15.5% in Q1), as the growth moderates in H2 FY23,” it said.

Sharekhan has also revised downward its earnings estimates by 0.7%-1.2% factoring in lower-than-expected margin performance in Q1, possibilities of US recession and continued supply-side challenges, partially offset by the INR-USD reset.

The brokerage said the current stock price correction offers a good entry opportunity for long-term investment and maintained its buy call on TCS with a revised price target of Rs 3,650.

Securities, which has an ‘add’ rating on the stock with a target of Rs 3,620, said TCS’ superior execution metrics, full-stack portfolio and industry drivers remain intact.

Emkay Global said Q1 numbers were a tad below estimates but it remains cautiously optimistic. “We cut FY23-25 EPS estimates by 1-3% due to the Q1 miss. The demand environment remains healthy in the near term; however, macro uncertainties weigh on valuations. We maintain Hold with a revised TP of Rs3,200 at 23x Jun’24E EPS (earlier TP Rs3,250),” it said.

Edelweiss, who is among the most bullish on TCS, said the demand environment continues to remain healthy despite macro uncertainties. “Margins are expected to improve over the course of the year. We believe strong demand and pipeline are likely to keep up earnings growth in coming quarters,” it said.

Ambit’s Ashwin Mehta said the likely growth/margin moderation suggests TCS is not immune to sector risks. Current valuation at 36 premium to pre-Covid average is not justified, he said adding that

is expected to narrow its valuation differential to TCS, in line with historical trends when growth has outperformed.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)