TCS stock after Q2 results: Should you buy, sell or hold? Check price target

Tata Consultancy Services (TCS) shares gained marginally on Tuesday, a day after the country's largest software exporter reported better-than-expected growth of 8 per cent in net income during the second quarter. At the opening, the counter gained 0.38 per cent or Rs 11.80 to trade at Rs 3,130.35 apiece on the NSE. The counter, however, surrendered intraday gains to trade in negative territory at 10 AM. 

Earlier on Monday, the counter closed 1.84 per cent higher at Rs 3,121.20 as against a 0.34 per cent correction in the benchmark Sensex. Similarly, the counter jumped around 1.93 per cent on the NSE to close at 3,124.

Meanwhile, brokerage firm ICICI Securities has maintained HOLD rating on the counter with a fair value of Rs 3,191.

TCS, the largest IT services exporter, reported an 8.4 per cent growth in its second quarter or Q2 net profit at Rs 10,431 crore, crimped by a dent in margins. The company's board also announced a dividend of Rs 8 per share - for which the payment date is November 7.

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The Tata group company has said that the operating environment is "challenging" and warrants "vigilance", even though the headwinds posed by factors like recession in its biggest market US, rising inflation around the world and currency volatilities are yet to materialise into its order pipeline.

Varinder Bansal, the founder of Omkara Capital Private Limited, is of the view that "if there is no bad news, it is a good news". 

"There are no big numbers announced by TCS but it is important to understand there were not much expectations. Even in this quarter, they have registered good growth in Europe and UK. So according to me, the numbers are good," Bansal said.

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Its Chief Executive Officer and Managing Director Rajesh Gopinathan said it is difficult to say if the company will be completely insulated from the events as they unfold, and made it clear that it will try to minimise the risks as much as possible.

The reporting quarter saw an 18 per cent jump in revenues to Rs 55,309 crore as against Rs 46,867 crore in the year-ago period, but it was a 1.60 percentage points narrowing in the operating margin to 24 per cent which crimped the profit growth.

Its Chief Financial Officer Samir Seksaria said an increase in human resource consultant fees led to a one percentage point dent on the margins, while a rise in discretionary spending on aspects like travel and marketing led to a further impact. The margins benefited from aspects like currency movements, which finally blended into a 1.60 percentage points impact.

He said the immediate target will be to take the operating profit margin to 25 per cent by the fourth quarter of the fiscal by focusing on improving utilisation and upping the realisations, and then touch the aspirational band of 26-28 per cent.

The company's Chief Operating Officer (COO) N Ganapathy Subramaniam said the overall demand environment for its services is good, but there are a few spots of softness like Europe where the focus is on grappling with the oncoming winter amid worries over energy supplies due to the war in Ukraine, and also the insurance segment.

He said there is a softness in decision making as well and clients are generally keeping off longer term deals which may be triggered by anxieties surrounding the geopolitical events and challenges on the macroeconomic front.

The company reported a total contract value of USD 8.1 billion with the largest deal being around USD 400 million, Gopinathan said. Subramaniam said the USD 2 billion very large deals are not coming at all in the market at present.

The COO said the pricing situation is stable and denied there being any pressure due to aspects like rupee depreciation, wherein clients would negotiate for a lower price.

The company added 9,840 employees on a net basis during the quarter to bring its overall workforce to 6.16 lakh. The attrition stood at 21.5 per cent.

The company's Chief Human Resources Officer Milind Lakkad said it will take a year for the attrition to come down to the aspired level of 20 per cent.

He further said the company has already hired 35,000 freshers in the first half of the financial year, and has a pipeline of up to 12,000 more hires which will ensure that it exceeds the target of hiring 40,000 people from campuses. It has 5 lakh aspirants vying for getting hired in FY24, even though a number is yet to be decided upon, he added.

Gopinathan said the supply side concerns which had impacted the industry over the last few years are over now.

Domestic brokerage Emkay said the revenue and margins came in line with its expectations, while analysts at its peer Reliance Securities said IT services would not remain immune to worsening global macros in terms of rising inflation, economic slowdown, currency headwinds and likely cut on spending.

With PTI inputs