The IT giant reported better-than-expected sales and a strong order book and looked prepared to capture pent-up demand. It also pleased investors with a Rs 16,000 crore in share buyback in addition to a Rs 12 per share dividend.
Analysts find TCS to be relatively better positioned to navigate the current challenges and gain market share from smaller players. But upside for the stock looks limited following a 68 per cent rally in last six months.
CLSA has maintained an ‘outperform’ rating on the stock with a price target of Rs 2,750 per share. On Thursday, the stock traded at Rs 2,864, up 4.6 per cent.
CLSA said the company’s order book was healthy and daily sales outstandings (DSOs) were the best ever, but rich valuation may limit absolute upside, the brokerage said even as it lifted its FY22 and FY23 EPS estimates for the IT firm by 3 per cent.
Goldman Sachs now has a higher price target of Rs 3,032 against Rs 2,688 earlier, as it has increased its EPS estimates for FY21-23 to 6 per cent. This brokerage said the company’s earnings were above expectation, “with the dawn of a multi-year technology upgrade cycle.”
Macquarie has a similar target of Rs 3,030 on the Tata Group stock, as it believes TCS is on the cusp of a strong growth cycle, with strong demand drivers for digital transformation. This brokerage has hiked FY21-23 EPS estimate for TCS by 3.5-8.4 per cent.
Two other foreign brokerages, Morgan Stanley and Citi, have lower price targets at Rs 2,500 and Rs 2,350, respectively.
Morgan Stanley has ‘equal weight’ on the stock even as it said September quarter EBIT margins were ahead of estimates.
Citi, meanwhile, has maintained a ‘sell’ rating on the stock with a price target of Rs 2,350. Instead, it prefers TechM, Infosys and HCL Tech in the IT pack.
Q2 earnings beat estimates
India’s largest IT services firm reported 4.9 per cent growth in second quarter profit at Rs 8,433 crore, and 3 per cent revenue expansion at Rs 40,135 crore. The company reported a 4.8 per cent sequential growth in revenue in constant currency terms, which too was ahead of analyst estimates. Operating margins stood at 26.2 per cent.
TCS said growth came from across verticals and geographies, with the larger North American market clocking 3.6 per cent growth. UK market grew 3.8 per cent and Europe 6.1 per cent.
“The TCS stock currently trades at 33 times FY21 and 27 times FY22 earnings. It remains the best execution story, though valuations remain rich. We begin coverage on the stock with a ‘Hold’ rating for a price target of Rs2,780 at 26 times September FY22 earnings,” Emkay Global said.
Strong order book
TCS won deals worth over $8.6 billion, highest in recent quarters, as customers stepped up spending on technology to sustain and reinvent their businesses. The company has rolled out salary increases for its over 4.53 lakh employees effective October 1. In the quarter to September, the company hired 9,864 people.
As BoB Capital Markets noted: “TCS’ deal pipeline is an even mix of large and small contracts. Excluding the Phoenix deal win, the TCV stood at $6.1 billion. The management is confident of H2FY21 growth despite uncertainties and seasonal weakness of Q3,” it said and suggesting a price target of Rs 3,180.
TCS CEO Rajesh Gopinathan made three key comments on Wednesday: The pandemic is a material catalyst to cloud and digital adoption. TCS is in midst of a multi-year technology transition wave. And growth is attributable to sustainable deals and not one-offs.
This made Edelweiss Securities believe that the Indian IT sector was at the beginning of a long-term tech upcycle. This brokerage has raised the valuation multiple for TCS for a fourth time in five months — to 40 times FY22 from 30 times earlier to arrive at a target price of Rs 4,000. So far, Edelweiss has been the most bullish on TCS.
Share buyback strategy
TCS has approved buyback of 1.4 5.3 crore shares at Rs 3,000, implying a total size of Rs 16,000 crore. The quantum of the buyback is similar to the last two buyback programmes. This amounts to 27 per cent of the company’s Rs 58,594 crore cash balance and 16 per cent of net worth.
Sharekhan said the buyback alone implies a payout of 49 per cent of its FY2021 PAT estimate. “The buyback should result in slight accretion to EPS from a reduction in share count. However, cash reduction would result in a decline in other income. Small shareholders owning shares as on the record date of Rs 2 lakh or less will get reservation in the buyback offers to the extent of 15 per cent of the buyback size. The reservation for small shareholders would be Rs 2,400 crore. As per the current ownership, 665,322 shareholders (holding up to 100 shares of TCS) have 2.01 crore of shares,” the brokerage noted.
TCS is buying back the shares at a 9.3 per cent premium to the current market price of Rs 2,737 per share.
“Most small shareholders do not take part in such offers, which would result in higher acceptance ratio. Investors looking for a short-term opportunity can buy up to Rs 2 lakh shares in the open market and offer them in the tender offer. Moreover, the company has declared a second interim dividend of Rs 12 per equity share, for which the record date is October 15,” Sharekhan said.