TCS hits over 7-mth high; rises 4% in three days despite market volatility

Analysts at ICICI Securities expect TCS' margins to improve from FY23 onwards due to utilization improvement and moderation of sub-contractor costs

Shares of Tata Consultancy Services (TCS) rose 1 per cent to hit an over seven-month high of Rs 3,498 on the BSE in Friday’s intra-day trade as investors turn to defensive stocks in a volatile market.

The stock of the information technology major was trading higher for a third straight day, rising 4 per cent over this period. It was quoting at its highest level since May 18, 2022.

In the past one month, TCS has gained 5 per cent as compared to a 1.8 per cent decline in the S&P BSE Sensex, while in the last three months, it has rallied 9 per cent versus a 1 per cent fall in the benchmark index. Though, it is down 9 per cent in the past one year as against a 2.3 per cent rise in the Sensex.

TCS bucked the trend in the December quarter (Q3FY23) by delivering revenue growth ahead of what the street was expecting. Revenue for the quarter came in at Rs 58,229 crore, up 19.1 per cent YoY in reported terms and 13.5 per cent year-on-year (YoY) in constant currency (CC) terms. The company's profit rose 11 per cent YoY to Rs 10,846 crore in the quarter.

Sequentially, TCS’s revenue was up 5.2 per cent. The company reported 2.2 per cent quarter on quarter (QoQ) CC growth for Q3 while dollar revenue growth was 2.9 per cent QoQ. EBIT margin improved 50 bps QoQ at 24.5 per cent.

The board had declared a third interim dividend of Rs 8 and a special dividend of Rs 67 per equity share of Re 1 each. The third interim dividend and the special dividend shall be paid on Friday, February 3, 2023 to the shareholders. The stock already turned ex-date for dividend on January 17, 2023. TCS said it is committed to give 80-100 per cent of free cash flow to shareholders.

Analysts at ICICI Securities expect the company's margins to improve from FY23 onwards due to utilization improvement, moderation of sub-contractor costs. The brokerage builds in margin expansion of 110 bps over FY23-25.

TCS has maintained it will exit FY23 with a EBIT margin of 25 per cent in Q4. The company indicated that the margin improvement for the medium term would be driven by improved utilisation, moderation of sub-contractor costs & moderation of attrition. It said that pricing is one of the levers for margin improvement but acknowledged that it will be challenging to get price increases in the current environment. 

Motilal Oswal Financial Services believes TCS, among their IT services coverage, is the best positioned to ride out the near-term moderation in technology spending, on account of macroeconomic stress in developed economies.

"With tech spending shifting toward cost efficiency (vs focus on transformation over the last two years), TCS revenue growth is expected to outperform its peers (FY24 at 9.2 per cent YoY CC vs large cap coverage median of 8.5 per cent YoY) on account of its industry leadership in cost optimization and strong order book. Further, its better operational efficiencies is expected to drive up its profitability, leading to 20 per cent YoY rupee PAT growth in a tough year, " the brokerage said. It reiterated the Buy rating on TCS with a target price of Rs 3,950 (29xFY24 and 25xFY25).