TCS Shares Dip Following Q2 Results; Buy, Sell Or Hold?

Shares of Tata Consultancy Services (TCS) took a beating on Friday’s trading session after the company reported its quarterly revenue. The software exporter reported a muted increase in net profits by over 5% on a Year on Year (YoY) basis for the July-September quarter. Though it saw an 8% surge in its revenue, its operating margin contracted slightly.

While revenue from operations surged 8% YoY to ₹64,259 crore, operating margins declined at 24.1%.

K Krithivasan, CEO and MD, TCS said, “Amidst an uncertain geopolitical situation, our biggest vertical, BFSI, showed signs of recovery. We also saw a strong performance in our Growth Markets. We stay focused on sharpening our value proposition to our clients, employees, and other stakeholders.”

On a quarterly basis, Net profit came down at ₹12,040 crore, a marginal decline of 1%.

Should investors buy or sell?

Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas said, “TCS reported weak set of numbers with a miss on both revenues and margins, though revenues miss was a tad below our estimates, margins performance surprised us negatively. Further, TCV wins at USD 8.6 bn below our expectations, and the 8-quarter average is ~USD 9.6bn. On the positive side, the employee headcount increased by 0.9% QoQ for the second quarter in a row, and the BFSI vertical was up 1.9% QoQ in USD terms, which was higher than the company average growth. With the FED easing cycle and stable macro prints, the growth recovery narrative still holds for the IT sector and TCS, stepping into the second half of fiscal FY25 and FY26. We have a BUY rating on TCS.”

On the other hand, JP Morgan has reduced the target price of the stock at ₹5,100 from ₹5,200.

The brokerage expects the growth to recover in the second half of the year. Margins are expected to return to normalcy following TCS’s strategic partnership with Bharat Sanchar Nigam Limited (BSNL) for rolling out 4G networks across India. It also reduced TCS’s margin and earnings per share (EPS) estimates for FY25 by 50 bps.

While maintaining a “Buy” rating, Nuvama noted, “Overall, Q2FY25 was a modest quarter for TCS, mainly due to client-specific issues. Management remains positive about demand, citing improvements in the macro environment. We expect growth for TCS, as well as the sector, to see a material uptick from Q4FY25 onwards.”

Emkay said, “TCS’s operating performance missed expectations in Q2. Revenue grew by 2.2% QoQ (1.1% CC) to $7.67 billion, in line with expectations. However, the revenue composition was weaker than anticipated, with a higher-than-estimated contribution from the BSNL deal, partly offset by softness in mature markets.”

It added, “We have cut earnings estimates by 1.2-2.4% for FY 25-27, considering the Q2 miss. After approximately 5% and 13% underperformance compared to the Nifty IT index over 3M and 6M, TCS’s relative valuation is not demanding.”

Retaining “Reduce” rating on TCS, it kept a target price of ₹4,500.

Citi reduced the target price to ₹3,935 from ₹4,010 by maintaining a “Sell” rating on TCS.

Citi emphasised a cautious demand environment, despite expectations of modest and gradual recovery.