TCS shares plunge 6%, ₹1 trillion lost, but quitters missed this

Tata Consultancy Services’ (TCS) shares plunged by over 6% in early morning trade on Monday, with its market cap losing as much as ₹1 trillion in minutes, after it reported a four per cent growth in earnings in the second quarter (Jul-Sep) of 2021-22 financial year which was well below estimates of analysts.

The IT giant’s consolidated net profit in the September 2021 quarter jumped to ₹9,624 crore from ₹8,433 crore in the year-ago quarter, due to broad-based growth across geographies and verticals. Its EBIT margins improved 10 bps QoQ to 25.6 percent, whereas revenue grew four percent QoQ in constant currency (CC) terms.

“TCS reported an inline revenue growth of four percent on a sequential basis in CC terms. However, dollar revenue growth missed our estimate. EBIT margin was also lower than our estimate on supply side challenges,” said brokerage firm Motilal Oswal.

The shares dropped from about ₹3,938 at close on Friday to ₹3,670 in early morning trade on Monday, causing its market capitalization to plunge to ₹13,62,564 crore from ₹14,55,687 crore on Friday.

According to reports, the market failed to take into account the fact that the earnings were hit by a rise in the dollar’s value against the rupee—it hit a 2-year high on Monday—as TCS is a highly export-oriented company that trades in dollars. In fact, a higher value of the dollar would result higher profits for the company.

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Despite the below-estimate growth, it is expected that the second half of a financial year would be strong on margins due to the absorption of wage hikes and leverage in operational costs.

However, Motilal said that the management has indicated that margin in the near term can be soft, led by ongoing supply-side challenges. The brokerage has a Neutral rating (target price ₹3,770) on the IT stock but remains optimistic, given its strong growth outlook.

Analysts at Kotak Securities 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,” they said.

Phillip Capital too expressed optimism, saying that TCS is expected to command valuation premium on the back of its “strong diversified profile, superior return profile (ROE of 38%), management stability and market leadership position”.

However, TCS’ Chief Human Resources Officer Milind Lakkad said the tech giant’s attrition rate had increased to 11.9 percent from 8.6 percent in the June quarter, and the high attrition levels are likely to continue for the next 2-3 quarters.

Brokerage Nirmal Bang said that talent costs, cross currency impact and investments seem to have eaten into the anticipated margin increase. It has an ‘Accumulate’ stance on TCS shares, with a target price of ₹3,772 per share.

“On the margin front, we are more sanguine as we believe that the cost pressures will peak in FY22 and will ease off in FY23, especially due to pyramid restructuring (78,000 fresher hires expected in FY22, about double the number in FY21 and a number much higher than guided for three months back),” Nirmal Bang’s note stated.

However, Prabhudas Lilladher has a ‘Buy’ rating on TCS with a target price of ₹4,113. The brokerage believes that TCS’ low attrition (as compared to peers) is a competitive advantage in the current environment, where growth is constrained more by supply rather than demand.

“The demand continues to be driven by three broad trends which are increased outsourcing, investments in building digital core and growth and transformation agenda,” the Prabhudas Lilladher note said.

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On the other hand, the analysts at Yes Securities remain positive on the stock as the robust demand environment would help it to report double digit revenue growth for FY22/FY23. Deal booking remains strong and would help to sustain growth momentum.

“There are near term margin headwind in this supply constrained environment. However, we expect it to maintain stable margin of ~26 percent aided by positive operating leverage. We maintain BUY Rating in the stock with revised target price of ₹4,395,” the brokerage said.

Meanwhile, 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 three percent while maintaining our ADD rating, valuing the stock at 32X September 2023E EPS,” the Kotak Securities note said.

Monday’s drop in the stock prices has reduced almost one lakh rupees from market capitalization for TCS. While the market cap of TCS was ₹14.55 lakh crore on Friday, the market cap was close to ₹13.7 lakh crore on Monday.