Tata’s crown jewel, Tata Consultancy Services (TCS), could outperform its peers and deliver best-in-class revenue and margins in the next financial year (FY25), said analysts at UBS, who believe The Street will not prices potential risks. rating in the stock.
“We see enough factors to believe that TCS can deliver industry-leading growth and margins among peers in FY25. These include: ramping up big deals like BSNL, NEST, Aviva etc; revival in the BFSI segment; uptick in cloud migration projects. and continued managed services require industry-level strength,” UBS analysts said.
The brokerage has increased their FY25/26 earnings per share (EPS) estimates by 3 percent/9 percent. It has upgraded the stock from ‘Neutral’ to ‘Buy’, valuing the company at 28x price-to-earnings ratio (previously 26x) based on FY 2026 earnings per share.
“TCS’s current multiple premium over peers is below historical average, and any outperformance calls for a revaluation,” it added.
On the stock exchanges, TCS shares rose 2.4 per cent to Rs 4,098 per share on the BSE during intraday trade on Tuesday. In comparison, the benchmark BSE Sensex rose 0.4 percent at 1:05 PM, while the BSE IT index rose 0.77 percent.
So far in CY24, the TCS has risen 5.4 per cent, against a 0.76 per cent rise in the benchmark and a 6 per cent rise in the BSE IT index.
Here are the top two reasons why UBS is bullish on TCS:
Positive surprise on turnover probably
According to the global brokerage, TCS could lead its peers in terms of revenue growth by 100-150 basis points in FY25. The brokerage estimates TCS’ dollar revenue growth at 8.8 percent year-on-year in FY25 versus 4.7 percent in FY24), surpassing peers’ expected growth of 3.6-8.2 percent (UBS estimate).
“We believe that the market is not fully taking into account the impact of the increase in the number of large deals. Furthermore, we believe that the potential recovery in demand in FY25E will positively surprise the market, in which it is currently not priced in” , according to UBS.
The brokerage expects the BSNL deal to generate revenues of $1.5 billion to $2 billion over the life of the deal, of which $1 billion could come in the next 12 to 18 months. This, the brokerage said, should add 2.5 percent to TCS’s revenue growth in FY25.
“In addition to the BSNL deal, the expansions of NEST, JLR and Aviva should contribute 0.8 percent to revenue in FY25. This is in addition to the 5.5 percent core revenue growth we expect for the company in FY25,” UBS added to.
Apart from that, the revival of BFSI deals (where TCS, HCL Tech and Accenture are the main beneficiaries of vendor consolidation) and the likely acceleration of cloud migration projects should boost deal revenues.
More levers for margin improvement
The sharp increase in attrition post-Covid led to pyramid distortion, costly backfilling and a decline in utilization, resulting in TCS gross margins being compressed by 300 basis points since March 2020.
The IT services sector has never seen such sharp swings in churn, according to UBS, and there will likely be a lag between the reversal of churn and improvements in operating metrics.
“We believe TCS is able to leverage its benchmark in the coming quarters and improve its utilization by another 200 basis points. We expect TCS to expand Ebit margins by 150 basis points by FY26,” the report said.
The brokerage expects margins to be partly helped by the depreciation of the rupee. Further, the company expects margins to deviate from FY26’s estimated margin of 26.3 percent, between -90 and 50 basis points, with a +/- 3 percent change in USD/INR rates.
“The average consensus price target of Rs 3,997, according to Bloomberg, is lower than the current market price even as 52 percent of consensus ratings are buys, indicating that the market is skeptical about growth/margin levers. We believe that any positive surprise in the future of the company’s performance should lead to positive upgrades,” UBS said.
The brokerage’s revised price target of Rs 4,700 (from Rs 4,050) suggests an upside of 17.5 percent from current levels.
First print: February 27, 2024 | 1:47 p.m IST