TCS share price may rally 16% even as Q1 results miss estimates; should you buy, hold or sell?

India’s largest software services exporter, missed Street estimates on all fronts. Image: Reuters

TCS share price is likely to rally 16 per cent from the current levels, even as April-June quarter results of FY22 missed estimates. On Friday, TCS share price fell to Rs 3,207.65 apiece, down over 1.5 per cent on BSE. India’s largest software services exporter, missed Street estimates on all fronts. On Thursday, ahead of Q1 earnings, TCS stock settled weak at Rs 3,257.10, down over half a per cent. At least five research and brokerage firms — Emkay Global Financial Services, Prabhudas Lilladher, Motilal Oswal Financial Services and Yes Securities — expect TCS stock to rally up to 16 per cent post first-quarter earnings. TCS posted a fall in net profit at Rs 9,008 crore, a decline of 2.6 per cent sequentially. While revenues during the quarter were up by nearly 4 per cent, sequentially, to Rs 45,411 crore.

Prabhudas Lilladher
Rating: Buy | TP: Rs 3,776 | Upside: 16%

The research firm has pegged a target price of Rs 3,776 apiece, up 16 per cent, with a buy rating to the stock. It added that TCS’ strategy to increase its participation in growth and transformation deals will strengthen its position in high quality, innovation led transformation projects which have better pricing power. Miss on revenue was due to impact of second wave of Covid-19 in emerging markets especially India, with loss of around Rs 350 crore revenues primarily led by TCS iON business and some government and private businesses. “Revenue lost in India business is expected to come back in coming quarters as COVID situation improves,” it added.

Emkay Global Financial Services
Rating: Hold | TP: Rs 3,500 | Upside: 7.4%

TCS signed deals worth a TCV of $8.1 billion in the quarter under review, continuing the deal closure momentum of the last quarter. The company saw a good mix of large and small deals during the quarter. It does not expect the deal pipeline mix to change materially (well-diversified mix). “The robust deal pipeline, along with strong deal wins, offers good revenue visibility for the coming quarters,” said the brokerage firm. The company saw healthy demand in Cloud Platform services, Enterprise Application services, Cyber Security and Analytics.

Yes Securities
Rating: Buy | TP: Rs 3,600 | Upside: 10.6%

The research firm said that the deal momentum would remain strong led by traction in cloud migration and other digital technologies, aided by its deep contextual knowledge of its clients’ technology landscape. It is well on track to post double-digit revenue growth for FY22/FY23 and expected to sustain FY21 EBIT margin of 26 per cent for FY22 led by favourable business mix and operating leverage. Free cash flow generation will remain strong with limited reinvestment requirements and that should help to sustain dividend
payout. It trades at PE of 27.6x on FY23E earnings, it further added.

Motilal Oswal Financial Services
Rating: Neutral | TP: Rs 3,400 | Upside: 4%

IT services have entered into a technology upcycle, with cloud- and data-driven deals coming into the market. Given TCS’ size, capabilities, and portfolio stretch, it is rightly positioned to leverage expected industry growth, said the brokerage firm. The company has consistently maintained its market leadership and shown best-in-class execution, which analysts think gives the company continued room to increase its margin, while demonstrating industry-leading return ratios.

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