TCS hits fresh high of Rs 1,939 post Q1FY19 result, but analysts cautious on rich valuation

It is TCS day on stock exchanges today, as the company now touches a fresh high of Rs 1,936.40 per piece on BSE. Investors were very optimistic on TCS share price after the company posted strong Q1FY19 earnings. The company even surpassed analysts estimates in both top-line and bottom-line growth. At around 10:37 hours, TCS share price was trading at Rs 1,938.40 per piece above Rs 61.40 or 3.27%. The company has marked a new high of Rs 1,939 per piece on stock exchanges. 

IT-giant Tata Consultancy Services (TCS) posted net profit of Rs 7,362 crore up by 23.73% from Rs 5,950 crore in Q1FY18 and up by 6.31% from Rs 6,925 crore in Q4FY18. It further recorded revenue of Rs 34,261 crore above 15.81% from Rs 29,584 crore in Q1FY18 and higher by 6.82% from Rs 32,075 crore in Q4FY18. 

A Bloomberg poll of analysts had predicted TCS profit and revenue at Rs 7,018 crore and Rs 33,979 crore during Q1FY19. 

Commenting on the Q1 performance, CEO and MD, Rajesh Gopinathan said: "We are starting the new fiscal year on a strong note, with the growth engine firing on all cylinders. Our Banking vertical recovered very nicely this quarter, while other industry verticals maintained their momentum. With a good set of wins during the quarter, a robust deal pipeline and accelerating digital demand, we are positioned well for the future.”

The intentions of investors were already out there in the open one day before TCS result announcement - they were confident in the company’s earning this quarter. Investors had taken TCS share price to a high of Rs 1,930 per piece on BSE on June 09. 

Kawaljeet Saluja and Jaykumar Doshi analysts at Kotak Institutional Equities said, “TCS reported excellent revenue growth of 4.1% powered by large deal ramp-ups and turnaround in the BFSI vertical. The company is on track to achieve ~10% c/c revenue growth for FY2019.”

But the duo is very cautious on the extremely rich valuation of TCS. 

The duo at Kotak said,”We expect ~10% c/c revenue growth in FY2019 powered by US$8.8 bn worth of large deals signed in 2HFY18. The stock has delivered 34% return since the large deal announcements. It is plausible that the company may sign similar quantum of deals over the coming quarters and drive similar profile of growth in FY2020E.”

Currently,  at 21X FY2020E earnings, the stock is more than pricing-in such a scenario. 

Just to put this in context, analysts at Kotak said, “TCS requires US$2.1 bn of revenue addition in FY2019 followed by CAGR of 11% in incremental revenues for the next 7-8 years to justify the current market price. Addition of high absolute revenues every year is not easy; even its closest competitor Accenture added US$1.6-2.7 bn of revenues on organic in its best years of FY2016-18E.”

They finally added, We like plenty of things about TCS, especially the success of its platforms bets and ability to stitch together large multi-service deals delivered on outcome pricing model. However, we do not agree with the rich multiples ascribed by the market. REDUCE.”

The next big thing in TCS would be their buyback proposal. TCS has  approved a proposal to buy-back upto 7,61,90,476 equity shares of the Company for an aggregate amount not exceeding Rs 16,000 crores being 1.99% of the total paid up equity share capital at Rs 2,100 per equity share subject to approval from shareholders. 

This buyback is proposed for a record date on July 18, 2018, while payment date is set at July 25, 2018. 

Considering the premium buyback valuation, the company is set to rise further. 

Earlier analysts have expected TCS to move toward Rs 3,500-mark. 

Sharekhan said, “With favorable capital allocation policy for investors (80-100% of annual FCF), we expect TCS to continue to trade at a premium to its peers. Hence, we upgrade our rating on the stock to Buy from Hold with a revised price target (PT) of Rs 3,500.” 

Elara Capital said, “Considering low execution risk (given strong deal pipeline, low trainee bench per our estimate), we retain our Accumulate rating and arrive at a new TP of Rs 3,470 on 20x March 2020E P/E (vs 20x March 2019E P/E).”

The duo at Kotak reiterated, "We raise our EPS estimates by 3-5% for FY2019-21E largely on the back of revision to INR/USD assumptions. REDUCE due to expensive valuations."