TCS is muted even as the rest of the IT pack is firm with Nifty IT up nearly 2%. In fact TCS is the only IT stock in red on Nifty after the Q4FY25 earnings missed estimates. Jefferies maintains a Hold rating on the stock with a revised price target of Rs 3,400 per share, implying just a 5% upside from current levels.
Jefferies cut the “FY26/27 EPS estimates each by 3.5% and expect an 8% EPS CAGR over FY26-28E. Whilst stock has de-rated to 22x PE and has limited derating risks, upsides are capped until the US GDP growth outlook improves.”
Jefferies on TCS: Demand uncertainty to limit margin expansion
Overall TCS’ EBIT margins contracted by 30bps to 24.2% despite 120 bps tailwind from lower pass-through costs as a result was BSNL ramp-down. This was due to higher-than expected employee costs on the back of merit-based promotions. According to Jefferies, TCS’ plan “to defer wage hikes from Q1 and the ramp-down of BSNL contract should support margin expansion in FY26. We tweak our FY26-27 margin estimates by 20-30 bps and expect margins to be in the 25% range over FY26-28.”
Jefferies on TCS: Macro worries
According to Jefferies one of the key reasons why they see limited upside for TCS from current levels is because of rising macro uncertainties. They believe these uncertainties “are making clients take a more cautious approach which in turn will limit growth/margin expansion.” They have cut their EPS estimates for FY26/27 by 3.5%.
Jefferies on TCS: Growth dragged by BSNL ramp down
One of the key reasons why TCS revenues from India declined 13.3% QoQ is the ramp down of BSNL contract. However, North America and UK both grew 0.4% QoQ in constant currency terms and revenues from Europe was up 0.8% QOQ. The verticals growth was driven by BFSI partly on the back of reversal of furloughs. The TCS Management highlighted that lower than expected growth in March impacted revenues in Q4.
According to the TCS Management, “overall revenues will be flat in FY26.” The management highlighted re-emergence of delays in decision making and pressures on discretionary IT spends from March. TCS expects retail, CPG, travel/logistics and Auto verticals to be most impacted due to recent the uncertainty on tariffs. As a result, Jefferies pointed out that “even though, we expect a pick-up in growth for TCS’ ex. BSNL (3% in FY26 Vs sub 1% in FY25), the ramp down of BSNL will result in overall revenues to be flat in FY26. We expect TCS to deliver 5-6% growth on a compounded bases in revenues over FY27-28.”