Despite TCS reporting lower than expected profit and margin numbers, Motilal Oswal sees potential upside in the stock. The domestic brokerage has maintained buy on the stock with a target price of 3,730, a 14% upside potential from current levels. tcs share They are down about 13% so far this year amid concerns of a broader market correction and a global slowdown, which could dampen IT spending.
Analysts say interest rate hike, slowing economic growth and rising geopolitical tensions have affected the macro environment and raised concerns over IT spending.
Motilal Oswal says that given the size of TCS, the order book and the risk of long-term orders and portfolio, it is well positioned to weather the weak macro environment and ride on projected industry growth.
,TCS has consistently maintained its market leadership position and has shown best-in-class performance. This allows the company to maintain its industry-leading margins and exhibit superior return ratios,” the brokerage said.
On Friday, Mumbai-based TCS reported that its net profit rose 5.2%. 9,478 crore in three months till June 30, less than analysts’ expectations 9,851 crore. Operating margin for the quarter stood at a multi-year low of 23.1%, up from 25.5% a year ago, primarily driven by annual wage growth, increased cost of management talent churn and gradually normalizing travel expenses. Because of the effect of doing.
The attrition rate in the Indian IT services major was 19.7%.
“Wage hike in Q1 negatively impacted EBIT margin by 150 bps. Elevated attrition, all-time high sub-contractor costs and resumption of travel expenses also impacted margins during the quarter. Lower other income resulted in lower net profit, down 4% QoQ,” Motilal Oswal said in a note.
Rajesh Gopinathan, chief executive officer and managing director, in his post-earnings remarks, said the IT major is yet to see any footprint of the slowdown on the demand side, but is cautious.
“Despite unbroken remarks, he indicated that the US would outperform Europe due to customer concerns over the slowdown. In our view, this is an early indication of industry commentary that is more realistic than the current view of no impact on technology spend. We are factoring in TCS revenue growth of 10.2% year-on-year (15.5% in Q1) in constant currency terms in FY13, as growth moderates in the second half of FY13,” Motilal Oswal said.
TCS expects margins to improve sequentially for the remaining quarters of FY23.
The brokerage said the margin decline “was higher than we expected, due to higher wage growth and sub-contractor expenses. Given the increased attrition and TCS focus on growth, we expect EBIT margins to decline 110 bps to 24.2% in FY13.” (vs. 26-28% medium-term guidance). TCS should start getting some benefit in total cost in FY23, with new hiring of 100K in FY22.”
Motilal Oswal said it has reduced FY23/FY24 EPS by 4% to make up for lower margins. We expect USD Revenue CAGR of 9.3% and INR EPS CAGR of 13.1% as against FY22-24 during the same period. our target value 3,730 means 28 times the estimated EPS for FY24, with 14% growth likely. We maintain our buy rating on the stock.”
TCS shares technical outlook
Santosh Meena, Head of Research, Swastika Investmart Ltd, says that TCS missed expectations in Q1 earnings as margins are under pressure and the job loss rate is still high. “Although TCS Stock Leading in its first quarter earnings on weak expectations. Hence knee jerk reaction is not expected while buying at lower levels.
“Technically, the counter is still forming a lower high and lower low where the 50-DMA of 3333 is an immediate hurdle; above this, we can expect a short-covering rally towards the 3470-3500 zone. Major buying interest will have to sustain above 3500 mark. On the downside, 3200 is an immediate support level; below this, it is vulnerable to a fall towards 3000 mark. 3,000 is a good level for new entrants.”