TCS gets a lift past its buyback price on better earnings expectations

It seems like there is no looking back for the Tata Consultancy Services stock. The stock has already surpassed its buy back price of ₹3000. When the buyback was announced in October, the stock was around ₹2700.

Of course, the TCS stock seems to be getting into a habit of doing this. When the company announced a buyback in June 2018, the stock scaled its then buyback price of ₹2100 in about three months.

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But this time, the resilience of the IT sector, and TCS in particular, is said to be the key driver for the stock to show such sharp gains. TCS is expected to announce robust revenue growth of about 2.6% quarter-on-quarter in constant currency. TCS is announcing its results on Friday.

While the third-quarter is usually a lean season for corporates, IT firms are seeing better days due to large deal wins. In fact, the IT sector is benefiting from the drive towards digitalization by large global corporates, and the shift to cloud services. Lately, TCS announced large deal wins from Deutsche and Prudential, but the Street will start factoring these next quarter.

Note that the company could still see some marginal revenue decline on a year-on-year basis even as profitability could come under a bit of pressure this quarter.

“We forecast earnings before interest and tax decline of 90 basis points resulting from wage revision rolled out with effect from October 1, 2020. Besides, wage revision, there are no meaningful pressure points on margins,” noted analysts at Kotak Institutional Equities in a client note.

The Street also reckons that TCS could raise its earnings guidance for the coming quarters due to the large deal wins and ramp-up in execution.

“TCS would call out the current pandemic as a key catalyst for the third wave of outsourcing, triggering a structurally high growth for the industry for a much longer period,” said analysts at Edelweiss Securities Ltd in a client note.