Analysts believe that the earnings were satisfactory and were in line with their estimates, with an optimistic management waiting for a turnaround in the near future. This is based on the management’s confidence on positive demand outlook, and improvement in the macro environment. However, analysts expect TCS as well as the sector to see a material uptick in growth from Q4FY25 onwards.
In the quarter under review all verticals recorded growth sequentially for TCS, except two including healthcare that declined 3.4 per cent and the telecom segment which also remained weak, said analysts at Nuvama Institutional Equities.
“Growth was primarily driven by the BSNL ramp-up. The decline in North America was surprising, but this was attributable to client-specific issues in healthcare and persistent weakness in the communications vertical,” said analysts at Motilal Oswal Financial Services (MOFSL).
On the other hand BFSI continued to show signs of recovery, particularly in North America,
growing 1.9 per cent quarter-on-quarter Q-o-Q. Growth markets and E&U surged 13.1 per cent and 4 per cent Q-o-Q, respectively.
Vital signs
Despite a subpar quarter, the company’s management remains optimistic about Gen AI, noting increased investments and a rise in client engagements to 600 in Q2 (up from 275 in Q1), with 86 projects going live compared to eight in Q1.
They anticipate discretionary spending to improve in the coming quarters, with BFSI expected to continue its recovery, retail rebounding after a strong holiday season, and manufacturing addressing temporary supply chain issues. Additionally, investments in the travel vertical are also returning.
The company’s total contract value or deal wins came in soft at $8.6 billion, but within management’s comfort range of $7–9 billion. Overall pipeline and qualified pipeline is at an all-time high, analysts noted.
“Management remains optimistic about demand revival as they see a recovery in BFSI and bottoming out of the retail vertical. We are cutting FY25E/26E EPS by -4.9 per cent/-3.9 per cent factoring in slightly lower growth and margins. We continue to value TCS at 30x Sep-26E PE. Maintain ‘Buy’ with a revised target price of Rs 5,100 (earlier Rs 5,250),” Vibhor Singhal, Nikhil Choudhary, and Yukti Khemani of Nuvama wrote in their result review note.
Analysts at Nomura also highlighted some positives on the IT sector, calling onset of the interest rate-cutting cycle and a potential thaw in decision-making by US corporates post US elections which may provide fillip to demand. They expect TCS’s revenue growth of 6.3-7.5 per cent year-on-year in FY25-26F (versus 4.1 per cent in FY24), adding that this depends on an improvement in deal wins.
However, not everyone is onboard with a positive outlook for TCS, as analysts at Emkay said that weak discretionary spending, client-specific challenges, slower decision-making, and client’s cautious behaviour amid macro uncertainties still weighed on revenue growth of the company in the September quarter.
The brokerage firm reduced its earnings estimates by 1.2-2.4 per cent for FY25-27 considering the Q2 miss. “After 5 per cent and 13 per cent underperformance compared to Nifty IT index over the last 3 months and 6 months, respectively, TCS’s relative valuation is not demanding. Given the lack of any near-term trigger, we retain ‘Reduce’ with target of Rs 4,500/sh at 28x Sep-25E EPS,” said those at Emkay.
Globally, most brokerages stayed bullish on TCS for the long term, highlighting steady hiring trends and continued recovery in BFSI as positive factors. Jeffries maintained its ‘Buy’ rating on the stock with a target price of Rs 4,735. Those at JP Morgan, too, maintained their overweight stance on the stock with a target of Rs 5,100. Meanwhile, Japanese brokerage firm Nomura gave a ‘Neutral’ call on the stock with a target of Rs 4,150.
Financial print in Q2
TCS reported a net profit of Rs 11,909 crore for the quarter, a 5 per cent increase from Rs 11,342 crore in the same quarter last year, although it dipped 1.08 per cent sequentially.
Revenue rose 7.6 per cent year-on-year to Rs 64,259 crore, with a sequential growth of 2.62 per cent. In constant currency, revenue increased by 5.5 per cent, while net income saw a 3.8 per cent year-on-year rise.
At 09:40; the share price of TCS was trading 0.67 per cent lower at Rs 4,200 a piece. By comparison, the BSE Sensex was down 0.23 per cent at 81,425 level.
First Published: Oct 11 2024 | 9:52 AM IST
