Shares of Tata Consultancy Services (TCS), India’s leading software exporter, opened lower on Friday. On Thursday, the Indian IT major reported a tepid 5% YoY rise in its net profit for the July-September (Q2) quarter as cautious trends seen in the last few quarters continued. The company saw a decent rise of about 8 per cent in its revenue, while its operating margin contracted slightly on a YoY basis.
Meanwhile, revenue from operations rose 8% year-on-year (YoY) to Rs 64,259 crore. In constant currency (CC) terms, revenue growth for the June-September period was 5.5% YoY. Operating margin for the quarter came in at 24.1%, a decline of 0.2% YoY.
“Amidst an uncertain geopolitical situation, our biggest vertical, BFSI, showed signs of recovery. We also saw a strong performance in our Growth Markets. We stay focused on sharpening our value proposition to our clients, employees, and other stakeholders,” said K Krithivasan, CEO and MD, TCS.
On a sequential basis, net profit was down by a marginal 1% from Rs 12,040 crore in the September quarter. Revenues increased 3% quarter-on-quarter (QoQ).
What Should Investors Do Now?
Reviewing the TCS Q2 results 2024, Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas, said, “TCS reported weak set of numbers with a miss on both revenues and margins, though revenues miss was a tad below our estimates, margins performance surprised us negatively. Further, TCV wins at USD 8.6 bn below our expectations, and the 8-quarter average is ~USD 9.6bn. On the positive side, the employee headcount increased by 0.9% QoQ for the second quarter in a row, and the BFSI vertical was up 1.9% QoQ in USD terms, which was higher than the company average growth. With the FED easing cycle and stable macro prints, the growth recovery narrative still holds for the IT sector and TCS, steeping into the second half of fiscal FY25 and FY26. We have a BUY rating on TCS.”
JPMorgan has maintained an ‘Overweight’ rating on TCS but lowered its target price to Rs 5,100 from Rs 5,200.
JPMorgan expects growth to recover in the second half of the year, particularly from the financial services and technology sectors. As the BSNL contract unwinds, margins are anticipated to return to more traditional levels. The brokerage has also reduced its margin and earnings per share (EPS) estimates for FY25 by 50 basis points and 2%, respectively, but suggests using any sharp correction in the stock as a buying opportunity.
Nuvama has maintained its ‘Buy’ rating on TCS with a revised target price of Rs 5,100 (down from Rs 5,250).
“Overall, Q2FY25 was a modest quarter for TCS, mainly due to client-specific issues. Management remains positive about demand, citing improvements in the macro environment. We expect growth for TCS, as well as the sector, to see a material uptick from Q4FY25 onwards,” Nuvama stated.
Emkay has retained its ‘Reduce’ rating on TCS with a target price of Rs 4,500.
“TCS’s operating performance missed expectations in Q2. Revenue grew by 2.2% QoQ (1.1% CC) to $7.67 billion, in line with expectations. However, the revenue composition was weaker than anticipated, with a higher-than-estimated contribution from the BSNL deal, partly offset by softness in mature markets,” Emkay noted.
“We have cut earnings estimates by 1.2-2.4% for FY25-27, considering the Q2 miss. After approximately 5% and 13% underperformance compared to the Nifty IT index over 3M and 6M, TCS’s relative valuation is not demanding,” it added.
Citi has maintained its ‘Sell’ rating on TCS and lowered the target price to Rs 3,935 from Rs 4,010.
The weak Q2 performance has raised concerns, with Citi anticipating EPS downgrades. Management commentary highlighted a cautious demand environment, although a modest and gradual recovery in IT services is expected. Citi continues to prefer Infosys, maintaining a ‘Neutral’ stance on it, while recommending a ‘Sell’ rating on TCS.
