Estimated default in TCS Q1 results due to a decline in operating margin; Should you buy, sell or hold?

TCS Shares: Tata Consultancy Services (TCS) missed analysts’ estimates in earnings for the quarter ended June 30, 2022 (Q1FY23). It reported a 5.21 per cent year-on-year growth in consolidated net profit at Rs 9,478 crore in the June quarter as against Rs 9,008 crore in the same quarter last year. Consolidated revenue for the quarter grew 16.2 per cent to Rs 52,758 crore as against Rs 45,411 crore in the year-ago quarter, the company said in a BSE filing. Consistent currency revenue growth stood at 15.5% year-on-year. The earnings report had no details on dollar revenue growth.

Ebit margin stood at 23.1 per cent in the June quarter, up from 25 per cent in the March quarter and 25.5 per cent in the June quarter last year.

Year-on-year, TCS managed to post double-digit growth across all segments of the business. Sequentially, the company’s bottom-line front was low. Notably, the quarter was challenging from a cost management perspective, as operating margins in Q1 were impacted by wage increases and other costs.

While the IT major is yet to see any footprint of the slowdown on the demand side, it is cautious, Chief Executive Officer and Managing Director Rajesh Gopinathan said in his post-earnings remarks.

TCS Q1 – Defaults on both revenue and margin

“Missing on both revenue and margins,” said Aditi Patil, research associate at Prabhudas Lilladher on TCS. According to Patil, the company’s revenue grew by 1.3 per cent QoQ in dollar terms (PLE: 2 per cent, cons: 1.5 per cent) and 3.5 per cent QoQ in CC terms (PLE: 4 per cent, cons: 3.6 per cent). , In dollar terms, growth was led by Retail & CPG (+4.5 percent QoQ), Communications & Media (+2.9 percent QoQ), Tech Services (+2.4 percent QoQ), Lifesciences and Healthcare (+2.3 percent QoQ). , BFSI rose 1.9 per cent QoQ. Growth in manufacturing (QoQ 0.2 per cent) was sluggish. Further, EBIT margin came in at 23.1 per cent, a decline of 190bps QoQ (Ple: 24 per cent, Cons: 23.5 per cent).

Mitul Shah, Head of Research Associate at Reliance Securities said, “TCS reported a weak performance in 1QFY23, with EBIT margin coming in at 23.1 per cent, which is 60bps lower than our estimate of 23.7 per cent”, adding, “EBIT increased by 4 per cent” QoQ (5 per cent YoY) to 121.8bn, while EBIT margin of 23.1 per cent (186bps QoQ / down 242bps YoY), down 60bps from our estimate of 23.7 per cent (consensus 23.5 per cent).

What should investors do now?

Shares of TCS are down nearly 13 per cent so far this year amid concerns of a broader market correction and a global slowdown, which could reduce IT spending.

“The default on topline and margins in the first quarter will reduce consensus estimates by 3-4 per cent. While management’s remarks so far point to resilient demand, we believe macro uncertainty on valuation multiples will be an overhang,” said Morgan Stanley, whose Equal Weight Rating on TCS with a target price of Rs 3,900 Is.

Despite TCS reporting lower than expected profit and margin numbers, Motilal Oswal sees potential upside in the stock. Domestic brokerages have maintained buy on the stock with a target price of Rs 3,730, which is likely to rise 14 per cent from current levels.

Motilal Oswal says that given the size of TCS, the order book and the risk of long-term orders and portfolios, 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 shown best-in-class execution. This allows the company to maintain its industry-leading margins and exhibit superior return ratios,” the brokerage said.

The views and investment suggestions of experts in this News18.com report are their own and not those of the website or its management. Users are advised to check with certified experts before taking any investment decision.

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