TCS falls nearly 5% on missing estimates in Q1; brokerages divided—What should investors do?

TCS share price target: After IT behemoth TCS (Tata Consultancy Services) disappointed the street with less than expected numbers in the quarter ended June 2022, the shares of the IT giant fell nearly five per cent in Monday's intraday trade on the BSE. The stock slipped more than four and half per cent to Rs 3111 a share around 10.30 am on the BSE. On Monday's intraday low, the stock is still available at 23% discount from its 52-week high value of Rs 4045.50 that the share touched on January 18, this year.  

As TCS missed the estimate in the results announced on Friday, the brokerage house remained divided on the IT counter. They largely maintained a bearish stance and slashed target prices in most of the cases. 

What brokerages say 

Global brokerage firm CITI recommended a 'sell' with a reduced target price of Rs 3015 saying revenues remained in line with expectations, but it missed on margin. The previous target price was pegged at Rs 3130.  

Likewise, Goldman Sachs reduced its target price from Rs 3738 to Rs 3678, however, it maintained a buy stance on the counter.  

Jefferies gave a 'Hold' rating with a reduced target price of Rs 3070 from Rs 3140. As per Jefferies, margin cut is clearly visible, while order book has also started to look flat.  

Similarly, Nomura gave a reduce rating, JP Mogan an underweight rating and UBS recommended a 'neutral' for target prices of Rs 2910, Rs 2800 and Rs 350 respectively. 

Meanwhile, domestic brokerage house Motilal Oswal is of the view that given TCS’ size, order book, and exposure to long duration orders, and portfolio, it is well positioned to withstand the weakening macro environment and ride on the anticipated industry growth.  

It reiterated the buy rating with a target price of Rs 3730, an upside of 14% on Friday's closing price.  

It feels TCS has consistently maintained its market leadership position and shown best-in-class execution, however, increase in interest rates, slow economic growth, and elevated geo-political tensions have impacted the macro environment and raised concerns over IT spends.  

Sharekhan maintained a 'Buy' on the stock with a revised target price of Rs 3,650 given its preferred strategic partner for vendor consolidation exercise, healthy deal wins and scope of margin improvement.  

Saying steady as of now but visibility and order inflow seem challenges, Nirmal Bang sees over 24% downside in the IT counter from its Friday's closing price. It recommended a sell for a target price of Rs 2,469.  

What should investors do?  

Reacting on TCS Q1 results, Santosh Meena, Head of Research, Swastika Investmart Ltd. said IT giant missed street expectations in Q1 earnings as margins are under pressure and the attrition rate is still high.  

"However, the counter headed in its Q1 earnings with tepid expectations, therefore there is no knee jerk reaction expected while buying can be seen at lower levels," Meena had said on Friday. 

Technically, the counter is still making lower highs and lower lows formation where a 50-DMA of 3333 is an immediate hurdle, above this, we can expect a short-covering rally towards the 3470-3500 zone, he said.  

"It has to remain above the Rs 3500 mark for any major buying interest. On the downside, 3200 is an immediate support level; below this, it is vulnerable to a fall towards the 3000 mark however 3000 is a good level for fresh entry," the expert added.  

TCS Q1 Result 

Earlier, TCS on Friday reported a 5.2 per cent rise in the June quarter net profit to Rs 9,478 crore, restricted by the impact of annual wage hikes and promotions that took operating profit margins to multi-quarter lows. 

The Tata Group company, which is the first in the country's over USD 220 billion software exports industry to report earnings, however, said that it does not see any adverse business impact because of worries around recession in its key markets. 

It reported a 16.2 per cent growth in the revenue at Rs 52,758 crore for the quarter, with all the big geographies and business segments reporting strong numbers, but it was operating profit margins, which slid down to 23.1 per cent, much lower than the aspirational band of over 26 per cent that hurt the profit growth.