TCS share price tanks nearly 7% on tepid Q2 results, top Sensex loser; should you buy, sell, hold?

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Updated: October 11, 2021 11:02 AM

TCS (Tata Consultancy Services) share price tanked nearly 7% on Monday morning as investors reacted to the quarterly results of the second most valuable listed company in India.

TCSThe IT major reported a net profit of Rs 9,624 crore during the previous quarter. (Image: REUTERS)

TCS (Tata Consultancy Services) share price tanked nearly 7% on Monday morning as investors reacted to the quarterly results of the second most valuable listed company in India. TCS share price hit an intra-day low of Rs 3,660 per share, 6.9%. The IT major was the worst-performing stock on S&P BSE Sensex, while the benchmark index was nearing all-time highs. On Friday, TCS reported a 29% on-year growth in consolidated net profits for the July-September quarter. The Tata Group company has also approved an interim dividend of Rs 7 per equity share for its shareholders.

The IT major reported a net profit of Rs 9,624 crore during the previous quarter. Revenue of the company improved 16.8% from the previous year to Rs 48,867 crore. Earnings before interest and taxation (EBIT) margins improved during the quarter to 25.6% from 23.2% earlier last year. So far this year, TCS share price is up 27%. Today’s massive drop in the stock price has erased nearly Rs 1 lakh crore in market capitalization for TCS. At the closing bell on Friday, TCS market cap was at Rs 14.55 lakh crore, however, on Monday morning the same was close to Rs 13.7 lakh crore. 

Should you buy or sell?

Motilal Oswal – Neutral
Target price – Rs 3,770

Analysts at Motilal Oswal said that although TCS reported in-line revenue growth, the USD revenue growth missed estimates. “We remain positive on the company, given its strong growth outlook. But high valuations leave limited room for disappointment. A miss on estimates in the second quarter, coupled with a soft margin outlook, can result in near term pressure on the stock,” they said. The stock has today slipped below the target price set by Motilal Oswal.

PhillipCapital – Buy
Target price – Rs 4,580

The brokerage firm said that although TCS had a moderate quarter, investors are expected to be disappointed. However, they added that they expect a strong performance in the coming quarters, and continue to believe that TCS can emerge stronger. “We expect TCS to continue to command valuation premium to its large-cap peers, on the back of its strong diversified profile, superior return profile (ROE of 38%), management stability and market leadership position,” they added. The target price implies an upside of 25% from today’s low.

Kotak Securities – Add
Target price – Rs 4,100

Analysts at Kotak Securities highlighted that  TCS missed their estimates due to a surprising moderation in growth in Continental Europe. However, the brokerage firm said that the Revenue growth outlook remains undimmed by recent underperformance. “TCS is better-positioned than peers to manage margin headwinds and participate in accelerated transformation spending. We cut our Fair Value by 3% while maintaining our ADD rating, valuing the stock at 32X September 2023E EPS,” they said. 

Yes Securities – Buy
Target price – Rs 4,395

Focusing on the positives, analysts at Yes Securities highlighted that TCS has maintained operating margin in a tough environment. “Robust deal booking and growing share of digital revenue provide strong visibility about revenue and margin outlook. Improved demand environment over next 2-3 years with stable margin and industry-leading return ratios would support current valuation,” Yes Securities said. The target price implies an upside of 20% from today’s low.

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