Brokerages find TCS valuations expensive post Q3 results; stock falls 2%

Domestic brokerage firms are looking cautious on IT major Tata Consultancy Services (TCS) post its Q3 results considering its expensive valuation.

Shares of TCS inched lower in Monday’s trade after the company on Friday reported flat growth in December quarter net profit at Rs 8,118 crore, and also made it clear that it will not be able to notch a double-digit revenue growth in FY20.

The IT major had posted a net profit of Rs 8,105 crore in the year-ago period.

The scrip closed 2.16 per cent down at Rs 2170.25 on BSE.

Edelweiss Securities maintained ‘Hold’ rating on the stock with a target price of Rs 2,175. “We reiterate TCS has best-in-class execution capabilities, but its expensive valuation and lack of margin levers keep us wary on the stock,” Edelweiss said.

Edelweiss added that FY20 revenue growth is likely to remain soft for TCS. Robust deal-wins and market leadership instills hopes of a recovery over the medium term. “The stock’s expensive valuation (22.9x FY21E EPS) compels us to retain ‘Hold’,” the brokerage house said.

HDFC Securities maintained ‘Neutral’ rating on TCS post Q3 results with a target price of Rs 2,025.

“We continue to believe that TCS’ trinity of ‘growth’- scale-durability is challenged in the near to medium term. While TCS’ supply-side metrics continue to be industry-leading (margins, attrition, offshore leverage), risks on the demand side with macros (Brexit) and client specifics across core verticals remain,” the brokerage house said.

The company’s overall revenue increased 6.7 per cent to Rs 39,854 crore under the IFRS system in rupee terms, while the operating profit grew 4.3 per cent to Rs 9,564 crore.

On the other hand, Kotak Institutional Equities maintained ‘Reduce’ rating on TCS with a fair value of Rs 2020. However, it said that TCS is a must have in the portfolio at the right valuation.

“The current price is, however, expensive with the stock trading at peak multiple in a moderating demand environment that does not make for a good stock return recipe,” Kotak said in a report.