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TCS expects weakness from this vertical while Street remains divided on prospects

TCS expects weakness from this vertical while Street remains divided on prospects

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By Reema Tendulkar   | Hormaz Fatakia  Oct 11, 2022 3:21:29 PM IST (Updated)

While certain brokerages remain optimistic about the company's future performance, some expect it to lag behind Infosys in the times to come.

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Tata Consultancy Services (TCS) expects weakness to come from the manufacturing segment due to the prevailing geopolitical situations in Europe, the management told CNBC-TV18 in an interview.
"From what we are seeing in the macro, this time, the weakness is likely to come through from the manufacturing side rather than from the financial and services side," he said, adding that he is also witnessing caution across manufacturing in Europe. "We need to be careful on how we are positioning on that."
Almost 9.3 percent of TCS' overall revenue in the September quarter came from the manufacturing segment. The management continues to maintain that while there is an increasing sense of caution in discussions but the same has not translated in their order pipeline.
TCS reported results on Monday evening where it crossed the Rs 10,000 crore mark in profits for the first time. Revenue and the company's operating performance also surpassed expectations.
The management continues to maintain its $7-9 billion quarterly deal win guidance and sees no reason to make any changes to that. Executive Director and COO N Ganapathy Subramaniam told CNBC-TV18 that the deal win range is a reasonable one to work within the current scenario.
Gopinathan also said that the focus over the next 6-12 months will be on execution and operational rigour and that they have not witnessed any form of customer pullback. COO Subramaniam also said that they do not anticipate any major client cancellations over the next two quarters.
Here's how the street is viewing TCS' results:
Macqurie Prefers TCS Over Infosys
Macquarie believes that the expansion in TCS' operating margin puts to rest issues that the issue could become structural. In a conversation with CNBC-TV18, Macquarie's Ravi Menon said that some of the estimates for TCS on the Street are 'extremely bearish' but not in Macquarie's case.
The firm believes that the company can continue to widen the margin gap with Infosys, and hence, it continues to prefer the Tata Group behemoth over the Bengaluru-based Infosys. Macquarie maintains its outperform rating on TCS with a price target of Rs 4,150.
Bernstein Optimistic But Watchful
Bernstein has an outperform rating on TCS with a price target of Rs 3,850. As per the brokerage's estimates, TCS' revenue was a beat while the margin was in-line. The firm called the company's $8.1 billion order book healthy and the commentary on deal closure and future pipeline as constructive.
Growth in continental Europe, which is facing increasing pressure from inflation and recession, increased to 14.1 percent in constant currency terms from 12.1 percent in the previous quarter. However, the brokerage remains watchful of macro risks, which can be detrimental to their estimates.
CLSA Finds No Alarms Yet
The Hong Kong-based brokerage believes that while signs of softness are appearing in TCS' long-term demand outlook, there is no reason to press the panic button yet. It has also reaffirmed its faith in the company's margin management. The revenue outlook for the near term remains intact.
TCS' ability to structure sole-sourced large, cost-takeout deals should aid in market share gains in a tough operating environment, according to the brokerage. CLSA has maintained its outperform rating on TCS with a price target of Rs 3,450.
Nomura's View Opposes Macquarie's
While Macquarie prefers TCS over Infosys, Nomura believes the opposite. The firm believes that there is no cheer on the growth outlook of the company. A flattening order book and longer decision-making cycle among clients are likely to weigh on TCS' growth, according to the brokerage.
With no meaningful change to earnings estimates, Nomura expects TCS' growth to lag behind Infosys. It has maintained its reduced rating on the stock with a price target of Rs 2,620.
Citi maintains sell rating
Citi has also maintained a sell rating on TCS with a price target of Rs 2,900. The firm highlighted that the company's order book of $8.1 billion is lower than the average of $8.7 billion over the last four quarters.
It highlights that demand sustainability holds the key.
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