India’s largest IT exporter posted better-than-expected results for Q2. Revenue growth was 3.9% quarter on quarter (QoQ), better than the consensus estimate of 3.5%. Earnings before interest and tax (Ebit) margin at 24% was resilient, with 90 bps QoQ expansion, ahead of the consensus estimate of 70 bps due to deft gross margin management, higher utilisation and slight moderation in subcontracting cost.
According to analysts, the company has maintained its industry-leading margin and demonstrated superior return ratios due to its responsible market leadership position and best-in-class execution. Though demand may slow down in the future, analysts said
would likely gain share from peers.
Macquarie maintained an outperform rating on TCS with a target price of ₹4,150. The brokerage believes that the management of TCS called out further headroom to improve utilisation. “Utilisation helps deliver margin surprise. Net hiring in the company is low, but we see that related to attrition,” it said.
CLSA, while maintaining its outperform rating, said the near-term revenue outlook remains intact with abating supply pressure. “In the long term, we can witness some softness in demand, but this does not raise alarms. Our confidence in the company’s margin management has increased,” the brokerage said.
TCS shares have fallen 17% in the last six months compared to a 4% fall in the Nifty index as investors have dumped IT shares on worries about a recession in the West.
Citi maintained its sell rating as it believes management commentary was mixed and not surprising given the backdrop.
