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TCS Q3 PAT at record high but EBIT margin misses estimates; should you buy?

Swati Verma/New Delhi 11 Jan 19 | 11:15 AM

Shares of Tata Consultancy Services (TCS) fell as much as 2.54 per cent in early trade on the BSE after the company's Q3 revenue and operating margins missed consensus estimates narrowly.

The country’s largest information technology (IT) services company on Thursday reported its highest-ever net profit of Rs 8,105 crore in the seasonally weak third quarter (Q3) of 2018-19 (FY19). This is the first time that TCS’s net income has crossed the Rs 8,000 crore mark, a Business Standard report said. READ MORE

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The Mumbai-headquartered company’s profit grew 24.1 per cent year on year (YoY) and 2.58 per cent sequentially.

The Rajesh Gopinathan-led company reported a 20.8 per cent YoY increase in its revenue at Rs 37,338 crore while constant currency revenue grew 1.8 per cent QoQ and 12.1 per cent YoY. The company's EBIT margin shrank 90 basis points QoQ to 25.6 per cent on increased hiring and higher sub-contracting expense (both indicative of a buoyant demand).

In a note, after the announcement of results, analysts at ICICIdirect said the company's results were below estimates, both on revenues and margins perspective. "The company's margins were impacted by rupee headwinds and supply side constraints. Pressure in margin and macro headwinds remain our key concern," they said.

The management said it was confident of posting double-digit revenue growth in the full year, along with meeting the margin target on the back of a strong order book coupled with momentum in the key banking, financial services and insurance (BFSI) vertical, especially in the US.

Maintaining a 'neutral' stance on the stock, Motilal Oswal Securities said, "Amid news of potential macro weakness, there is a limited case to build further upside to our revenue estimates. The stock trades at 21x/19x FY20/21E. Our TP of Rs 2,000 discounts forward earnings by 20x."

Referring to its third quarter margin and comments, the brokerage added there was a risk of reduction in margins in TCS and peers in the near term. TCS’ 9MFY19 EBIT margin of 25.7 per cent amid an 8.4 per cent YoY depreciation in the rupee during the period. "This drives a 70-80 bps cut in our profitability estimate, and we believe that the aspired band of 26-28 per cent may remain elusive for a while (FY19/20/21 estimate of 25.7/25.8/25.9)," it said.

During the quarter under review, TCS booked deals with a total contract value (TCV) of $5.9 billion, with healthy contributions from North America ($3 billion), BFSI ($2 billion) and Retail CPG (over $800 million).

HDFC Securities is bullish on TCS based on strong growth visibility backed by robust deal bookings, growth leadership in digital segment, revival in BFSI vertical and efficient capital allocation. The brokerage has maintained a 'BUY' rating with a TP of Rs 2,430, at 24x Dec-20E EPS, supported by leading organic growth within tier-1 IT.

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