TCS hits 52-week low; slips 9% in one week on Q1 margin disappointment

HSBC Securities believe relative premium to the market and likely slowdown in revenue growth will continue to restrict upside for IT stocks in the near term

Shares of Tata Consultancy Services (TCS) hit a fresh 52-week low of Rs 3,003, down 1 per cent on the BSE in Thursday's intra-day trade, falling below its previous low of Rs 3,023.35 touched on June 17, 2022. The stock of the information technology (IT) bellwether was trading at its lowest level since March 2021.

In the past one week, the market price of TCS has declined 9 per cent as the Tata Group company reported a 185-basis point (bp) sequential decline in earnings before interest and tax margin to 23.1 per cent for the quarter ended June, 2022 (Q1FY23). In comparison, the S&P BSE Sensex has slipped 1.3 per cent and S&P BSE IT index 1.7 per cent during the same period.

Analysts at ICICI Securities expect margins to be under pressure until 2023-24 (FY24), resulting in margin contraction of 30 bps between 2021-22 (FY22) through FY24. Meanwhile, those at Nomura have lowered dollar revenue growth expectations to 9 per cent YoY from 10.8 per cent earlier, factoring in sluggish order bookings and cross-currency headwinds.

"Margin of 23.1 per cent was a slight miss due to wage hikes and other cost increases (like higher sub-contracting), though unlike last year we are not worried on margins. Demand slowdown usually triggers strong cost controls by IT companies and currency is favourable as well," analysts at HSBC Securities said in their result update.

However, the brokerage firm believes relative premium to the market and likely slowdown in revenue growth will continue to restrict upside for IT stocks in the near-term.

"TCS remains a leader in terms of both size and market positioning in emerging technologies. However, considering what we view as low upside potential on revenues and valuations, we prefer to remain on the side-lines," the brokerage said.

Meanwhile, TCS' management, in Q1 conference call, said that the company has not seen any budget cuts or deferments so far.

"In conversations with clients, we see continuing investments in technology. Some clients, particularly in Europe have expressed concerns about the macroeconomic fallout of the ongoing conflict there. But the predominant sense is that technology spending will be resilient. That said, given the macro level uncertainties, we remain very watchful," the management said.