TCS Shares Fall As Q3 Results Fail to Impress D-Street; Should you Buy, Sell or Hold?

The December quarter earnings of India’s largest software exporter Tata Consultancy Services failed to impress investors despite surprising on the revenue front. TCS shares declined more than 2 per cent intraday on January 10, a day after the company released its December quarter (Q3FY23) earnings.

For Q3FY23, TCS reported 11 per cent year-on-year (YoY) growth in net profit, which stood at Rs 10,846 crore. Revenue for the quarter came in at Rs 58,229 crore, up 19.1 per cent YoY in reported terms and 13.5 per cent YoY in constant currency terms. Sequentially, revenue was up 5.2 per cent.

Growth for the quarter was broad-based in terms of both geography and verticals and it was further propelled by cloud demand and market share gains. However, the company did not quantify the cloud momentum.

TCS does not give guidance but the management said that it is confident about the demand scenario. It further said technology spends are intact.

This quarter in terms of demand has been about different markets behaving differently. North American demand continues to be vibrant. The UK is a challenging operating environment, and Europe is the only market where decision-making is getting impacted due to the current geopolitical challenges,” said Rajesh Gopinathan, CEO and MD, TCS.

Gopinathan said: “Looking ahead and beyond current uncertainties, our longer-term growth outlook remains robust.”

Analysts, however, were divided on how to assess the reported numbers. Sanjeev Hota, head of research, Sharekhan by BNP Paribas, said: “Management commentary on demand environment looks hazy for short to medium term, owing to the uncertain global environment. At the current juncture, owing to multiple global headwinds, the outlook for FY24 looks uncertain, but the recovery could be gradual in the coming quarters. Structural growth story for the Indian IT sector remains intact, and TCS being the flagbearer will emerge stronger. Notwithstanding near-term volatility, we remain constructive on TCS for the long term.”

TCS earnings maintain momentum in the seasonally weak quarter. Deal wins’ TCV at $7.8 billion, 2.6 per cent growth YoY, was a tad soft largely due to tepid activity outside the US and the UK. We will await management comments on whether this weakness was skewed or broad-based outside the US,” said a first cut note from Elara Capital.

What Should Investors Do?

JPMorgan has remained ‘underweight’ on the stock with a target at Rs 3,000 per share. The book-to-bill is declining, while net hiring is negative. The stock trades at 26x 1-yerr forward P/E, 30 per cent premium to pre-COVID.

Its 5-10-yerr average looks unjustified given worsening macro & continued slowdown, reported CNBC-TV18.

Jefferies maintained its hold rating on TCS with a target price of Rs 3500 post December quarter results. Q3 revenues beat estimates but profits were missed due to forex losses. Declining headcount and book-to-bill ratio falling to a 3-year low point to a sharp growth moderation, said the note.

Morgan Stanley maintained an equal weight rating on TCS with a target price of Rs 3350 post Q3 results. TCS posted revenue beat (positive) but weak book-to-bill ratio (negative). Resilient performance and balanced commentary affirm optimism for FY24 growth, said the note.

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