TCS m-cap soars past Rs 12 trn post Q3 nos; analysts see up to 32% upside

Topics TCS | Buzzing stocks | Markets

Analysts at ICICI Securities said TCS has multiple levers to drive margins, going forward
Tata Consultancy Services (TCS) became the first Indian information technology (IT) company and overall the second listed company to cross Rs 12 trillion market-capitalisation (market-cap), on Monday, after reporting a healthy set of numbers for the October-December 2020 quarter (Q3FY21).

Shares of TCS hit a fresh record high of Rs 3,224; up 3 per cent on the BSE in early morning trade after brokerages maintained ‘buy’ rating on the stock. The company’s Q3FY21 numbers were above analysts' estimates on all fronts. The company said it could return to a double-digit growth trajectory next year. On the National Stock Exchange (NSE), the stock hit fresh all-time high of Rs 3,230, up 3.5 per cent.

At 09:19 a.m, TCS' market-cap stood at Rs 11.90 trillion, after the stock erased partially its early morning gains on the BSE and NSE. The stock was trading 1.7 per cent higher at Rs 3,172, against 0.67 per cent rise in the S&P BSE Sensex, the exchange data shows.

In the past one month, TCS has outperformed the market by surging 15 per cent, as compared to 8 per cent rise in the S&P BSE Sensex.

TCS' quarter on quarter (QoQ) growth in revenues was led by healthy demand in core transformation services and conversion from earlier deals. US dollar revenues grew 5.1 per cent QoQ to $5,702 million. On a constant currency basis, the revenue growth was 4.1 per cent QoQ and 0.4 per cent year-on-year (YoY). EBIT (earnings before interest and tax) margins expanded 42 basis points (bps) QoQ to 26.6 per cent. TCS has declared an interim dividend of Rs 6 per share.

Analysts at ICICI Securities said TCS has multiple levers to drive margins like utilisation, productivity improvement, savings due to Secured Borderless Workspace (SBWS), automation and revenue growth. Hence, we expect TCS to register healthy margin improvement of around 270 bps over to 27.3 per cent FY20-23E, the brokerage firm said result update.

Going forward, global digital technologies are expected to witness robust growth (around 15-20 per cent CAGR in the next five years) led by robust growth in cloud, customer experience and robust growth in cloud native technologies.

Considering TCS’s digital prowess coupled with market share gains via vendor consolidation, captive carve outs and increase in outsourcing we expect TCS to register robust growth in revenues in coming years. This, coupled with healthy margins and better capital allocation prompt us to be positive on the stock from long term perspective, it said. The brokerage has maintained ‘buy’ rating on the stock with revised target price of Rs 3,600 per share.

"We maintain ADD on TCS, following a back-to-back stellar performance and positive commentary. Key positives included broad-based (verticals & services) growth outperformance (strongest 3Q in nine years) supported by better conversions, robust deal wins with total contract value (TCV) at USD 6.8 billion (ex-PBS Deutsche deal), 9MFY21 TCV higher by 23 per cent and strong bookings/ramp-up expected in 4Q, margin outperformance supported by operating leverage & efficiencies," HDFC Securities said in stock update.

Meanwhile, global brokerage Morgan Stanley said TCS reported revenue better than its estimates due to a broad-based improvement in the demand environment and strong execution, suggesting that the firm may be in an earnings upgrade cycle.
"We believe demand is inflecting and TCS is well positioned to benefit from it. Slight increases in our FY21-23 EPS estimates, higher long-term forecasts, rolling our valuation forward to March 2023 (from Sep 2022), and a higher bull case probability boost our price target by 32 per cent to Rs 3,750," analysts at the brokerage said in a note.

Those at Goldman Sachs too remain bullish on TCS post its Q3 numbers as it retained a BUY rating on the stock and raised target price by 7 per cent to Rs 3,626. "TCS will be one of the key beneficiaries of the current wave of IT outsourcing and cloud migration given TCS' scale of operation, wide set of capabilities, client base and a large pool of reskilled employees trained on various cloud platforms," they said in a report.

However, Kotak Institutional Equities has a reduce rating on the stocks due to full valuation. It believes the positives are more than adequately discounted in the current market price. "TCS impressed once again with all-round growth led by execution on digital priorities of clients and ramp-up of large deals. The company will be at the forefront of accelerating digital shift and core transformation for clients leveraging its full-service suite. We raise FY2021-23E EPS by 2-6% and fair value to Rs 3,070  from Rs 2,920 earlier," it said.

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