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NEW DELHI: TCS' strong deal wins and sustained digital growth impressed analysts in a seasonally weak quarter, but sequential weakening of margins due to higher subcontracting cost remains a worry, say analysts.
This has prompted them to reduce their earnings forecast for firm.
The 26-28 per cent margin band will be elusive for a while, they said, adding that a likely slowdown in US could bite revenue growth, going ahead.
The IT giant on Thursday reported a 24.1 per cent growth in YoY profit at Rs 8,105 crore for October-December, largely in line with ET NOW poll estimate of Rs 8,150 crore.
Revenue for quarter rose 20.80 per cent YoY to Rs 37,338 crore.
Margins for quarter under review fell 90 basis points to 25.60 per cent on a sequential basis.
Edelweiss Securities attributed higher subcontracting cost to strong demand for digital work, for which talent is in short supply.
The trend of supply shortage was even mentioned by a few companies such as Infosys and Hexaware in September quarter, citing demand headwinds onsite.
“TCS’ Q3 margin and comments imply that there is a risk of pruning of margins across board, at least in near term, and that pressure could be more exacerbated for peers,” Motilal Oswal Securities said in a note.
Nirmal Bang Institutional Research believes that this could be an attempt by TCS to hoard talent as availability of right talent in next few quarters would be critical to gaining market share.
“Sub-contractor costs rose 60 bps QoQ to a multi-year high at 7.6 per cent of sales.
TCS also hired aggressively in YTD FY19 at 27,000 net hires versus just 7,000 in YTD FY18.
This move impacts both direct costs and SGA,” brokerage said, while assigning a sell rating on stock with a September target price of Rs 1,545.
Book-to-bill ratio for IT major improved to 1.12 times in December quarter, from 0.95 time average of first and second quarter, said HDFC Securities.
“EPS estimate for firm has moderated marginally to factor lower margin (elevated sub-con expense in near term) as we build 10 per cent/15 per cent dollar revenue/EPS CAGR over FY18-21E,” brokerage said while maintaining a buy on stock with a target of Rs 2,430.
TCS is perhaps one of two global leaders with a broad range of capabilities, strong digital competencies, ability to structure and execute large multi-year, multi-service deals offered on an outcome basis, strong platform bets and most importantly, consistency in strategy and strong execution, said Kotak Securities, which believes that “it's a must-have stock but at a price”.
“The current price has corrected by 20 per cent from highs of three months ago, though not enough to warrant a rerating.
Valuations are rich yet – we value stock at 18X September 2020E earnings, resulting in a fair value of Rs 1,825 from Rs 1,950,” brokerage said.
