Broker’s Call: TCS (Buy) – The Hindu BusinessLine

https://www.thehindubusinessline.com/markets/brokers-call-tcs-buy/article67076277.ece

Clipped from: https://www.thehindubusinessline.com/markets/brokers-call-tcs-buy/article67076277.ece

Target: ₹3,960

CMP: ₹3,340.65

Tata Concultancy Services’ CC (constant currency) revenue growth q-o-q and margin missed BNP Paribas estimates in Q1-FY24, mainly as clients stayed cautious on tech spending. Results were, however, largely in line with the beaten down Bloomberg consensus.

TCS noted that customers have been re-assessing tech spends, especially where RoI was low, and it avoided giving any indication of the timing of a demand recovery. However, TCS is optimistic about Generative AI (GenAI) as it is currently working on multiple proof of concepts, with 100 opportunities in the pipeline.

We see TCS benefiting, both on demand and cost, from GenAI’s new uses cases and higher productivity. We see subsiding macro concerns as key to demand recovery as deal signings ($10.2b, book-to-bill: 1.4x, ex-BSNL) and pipeline remain strong. TCS still aspires to get EBIT margin back to 26-28 per cent and exit FY24 with a higher margin y-y.

Continued strong deal signings give us confidence that the slowdown is transient and we think TCS will gain revenue market share in a cost-focussed demand environment.

At 22x FY25E P/E, below the last 5-year mean NTM P/E of 26x, we think near-term demand risks are priced in for TCS. We cut our FY24-26 EPS by 2-3 per cent as we bake in Q1 results and management commentary. Our DCF-based TP falls by 2 per cent.

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