Tata Consultancy services the firm with the largest software services provider has outperformed by the most in the last year and it has helped Nifty50 Rally by coming under the top three counters.
The stock has rallied 69% from its 52 week low, touched in September 2017. It has driven by several factors like consistency in earnings momentum, rising contribution from digital space and strong management outlook. While before the rally started, the entire IT Sector has underperformed.
In last 1 year, the Nifty IT index itself has surged over 48% against 1 % gains in the earlier year. Also, there is another reason for the upside is the sharp depreciation in Indian rupee. On Wednesday, Indian Rupee touched a fresh record low of 70.50 to the dollar, falling more than 10% from 64 a dollar level traded a year back.
Due to weakness in major verticals like BFSI (banking, financial, services and insurance) and retail where there was lack of visibility in the industry and continued pressure in the legacy portfolio, every IT was facing challenges, Niharika Ojha, IT Analyst, Narnolia Financial Advisors said.
She added, However, the management of TCS gradually gained the confidence of investors by boosting performance in the digital business and increasing spending in America in its major verticals during the last three quarters.
Even when the industry was going through a tough situation, TCS performed well on the margin front. TCS has maintained EBIT margin of 25 %.
For TCS, the BFSI segment has shown a turnaround. TCV (total contract value) has increased to USD 4.9 billion which mainly came from BFS (USD 1.6 billion). Even the management capital allocation policy (buyback in July) is acting as the support to the current trend, Niharika feels.
In FY19 TCS has shown its strong start. It is mainly led by a recovery in BFS and a strong performance by the retail segment.
In Q1FY19, the company posted better-than-expected results on the back of strong growth in digital business. The company reported revenue at Rs 34,270 crores registering QoQ growth of 6.8 % and YoY growth of 15.8%, while bottom line registered 24 % YoY growth & 6% QoQ growth at Rs 7,300 crores.
Revenue from digital engagements contributed 25% of the company’s revenue. In Q1 FY19, the company witnessed 44.8 % YoY growth in digital business & 4.1 % growth in BFSI vertical. It has signed the contracts worth of USD 4.9 billion in Q1FY19.
Margin managed to stand at 25 % mainly resulted from operational efficiency and INR depreciation benefit. BFS segment (31 % of total revenue) showed a recovery in Q1 with the growth of 8 % QoQ on account of recovery in North America. TCV is way ahead of the peers like Infosys.
The performance in quarters ahead is expected to be maintained driven by its BFS segment, strong deal pipeline, and digital push, after a strong start of the year, all experts are agreed.
Experts are mixed in their opinion on stock performance going ahead due to the sharp rally is seen in the last one year.
AK Prabhakar, Head of Research, IDBI Capital Markets & Securities said given the preference for large-caps he expects TCS to continue to do well in the near term.
“TCS has been reporting good results for the last few quarters. The 40 percent plus YoY growth in Digital solutions in the last two quarters and momentum in large deals make us believe that it would report the best improvement in revenue growth in FY19 amongst IT large-caps. We also like the consistency in payout to shareholders, especially through share buyback,” he reasoned.
Astha Jain, Senior Research Analyst, Hem Securities is also positive on the future outlook of the company and suggests one-year price target for the company anywhere between 10% and 20% above from current level.
She believes that company’s deep domain expertise, contextual knowledge and strong solution capabilities built up over the last many years’ positions company well to cater to growth opportunities present in the sector.
Whereas Niharika Ojha expects strong sales and PAT growth, but due to higher valuation she does not see any significant upside for the stock price. Currently, Narnolia has a Neutral rating on the stock with a target price of Rs 2,100.
Going forward with the recovery in BFS segment, robust deal pipeline and accelerating digital demand, she expects a strong revenue performance in FY19. “Even the management is optimistic of strong visibility in BFS and Retail in the medium term. We expect sales growth of 16.8 % in FY19 with EBIT margin of 25%.”
Sanjiv Bhasin, EVP-Markets & Corporate Affairs, India Infoline also feels IT stocks already run its course and he is not gung-ho on the sector through the rupee has been depreciating.
TCS can see another 5-7 % rally from here on and Sanjiv can be a market performer but not outperformer from now.
To play on the rupee front, Sanjiv Bhasin likes to bet on pharma space rather than IT wherein valuations already stretched and over-owned by fund houses.