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TCS Q3 review: A ‘must-have’ stock but at a lower price, say brokerages – Economic Times

TCS Q3 review: A ‘must-have’ stock but at a lower price, say brokerages – Economic Times

NEW DELHI:

TCS

‘ strong deal wins and sustained digital growth impressed analysts in a seasonally weak quarter, but sequential weakening of margins due to higher subcontracting cost remains a worry, say analysts.


This has prompted them to reduce their

earnings

forecast for the firm.


The 26-28 per cent margin band will be elusive for a while, they said, adding that a likely slowdown in the US could bite revenue growth, going ahead.


The

IT

giant on Thursday reported a 24.1 per cent growth in YoY profit at Rs 8,105 crore for October-December, largely in line with

ET NOW

poll estimate of Rs 8,150 crore. Revenue for the quarter rose 20.80 per cent YoY to Rs 37,338 crore.


Margins for the quarter under review fell 90 basis points to 25.60 per cent on a sequential basis.


Edelweiss Securities attributed higher subcontracting cost to strong demand for digital work, for which talent is in short supply.


The trend of supply shortage was even mentioned by a few companies such as

Infosys

and Hexaware in the September quarter, citing demand headwinds onsite.


“TCS’

Q3

margin and comments imply that there is a risk of pruning of margins across the board, at least in the near term, and that the pressure could be more exacerbated for peers,” Motilal Oswal Securities said in a note.


Nirmal Bang Institutional Research believes that this could be an attempt by TCS to hoard talent as availability of right talent in the next few quarters would be critical to gaining

market

share.







Book-to-bill ratio for the IT major improved to 1.12 times in the December quarter, from 0.95 time the average of first and second quarter, said HDFC Securities.


“EPS estimate for the firm has moderated marginally to factor lower margin (elevated sub-con expense in the near term) as we build 10 per cent/15 per cent dollar revenue/EPS CAGR over FY18-21E,” the brokerage said while maintaining a buy on the stock with a target of Rs 2,430.


TCS is perhaps one of two global leaders with a broad range of capabilities, strong digital competencies, ability to structure and execute large multi-year, multi-service deals offered on an outcome basis, strong platform bets and most importantly, consistency in strategy and strong execution, said Kotak Securities, which believes that “it’s a must-have stock but at a price”.


“The current price has corrected by 20 per cent from highs of three months ago, though not enough to warrant a rerating. Valuations are rich yet – we value the stock at 18X September 2020E earnings, resulting in a fair value of Rs 1,825 from Rs 1,950,” the brokerage said.


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