TCS investors lose ₹1 lakh crore in minutes as shares slump. Should you buy the dip?

Shares of Tata Consultancy Services (TCS) plunged over 6% in Monday's opening deals after the IT major's second quarter revenue and margin came below analysts' estimates. TCS market capitalization fell to ₹13,62,564 crore on the BSE in early session from ₹14,55,687 crore as on Friday. 

TCS' consolidated net profit in the September 2021 quarter jumped to ₹9,624 crore from ₹8,433 crore in the year-ago quarter, aided by broad-based growth across geographies and verticals. Its EBIT margins improved 10 bps QoQ to 25.6%, whereas revenue grew 4% QoQ in constant currency (CC) terms.

"TCS reported an inline revenue growth of 4% on a sequential basis in CC terms. However, dollar revenue growth missed our estimate. EBIT margin was also lower than our estimate on supply side challenges," said brokerage firm Motilal Oswal. 

2HFY22 is seasonally strong for margin, given the absorption of wage hikes and operating leverage. However, Motilal said that the management has indicated that margin in the near term can be soft, led by ongoing supply-side challenges. The brokerage has as a Neutral rating (target price ₹3,770) on the IT stock. It remains positive on the company, given its strong growth outlook, but high valuations leave limited room for disappointment.

TCS' attrition rate increased to 11.9% from 8.6% in the June quarter, and the high attrition levels are likely to continue for the next two-to-three quarters, as per the IT giant's chief human resources officer Milind Lakkad.

Another brokerage Nirmal Bang said that talent costs, cross currency impact and investments seem to have eaten into the anticipated margin increase. It has an ‘Accumulate’ stance on TCS shares with a target price of ₹3,772 per share.

“On the margin front, we are more sanguine as we believe that the cost pressures will peak in FY22 and will ease off in FY23, especially due to pyramid restructuring (78,000 fresher hires expected in FY22, about double the number in FY21 and a number much higher than guided for 3 months back),” the brokerage note stated.

However, Prabhudas Lilladher has a ‘Buy’ rating on TCS with a target price of ₹4,113. The brokerage believes that TCS’ low attrition (as compared to peers) is a competitive advantage in the current environment where growth is constrained more by supply rather than demand.

The demand continues to be driven by three broad trends which are increased outsourcing, investments in building digital core and growth and transformation agenda, the Prabhudas Lilladher note said.

Meanwhile, analysts at Yes Securities remain positive on the stock as the robust demand environment would help it to report double digit revenue growth for FY22/FY23. Deal booking remains strong and would help to sustain growth momentum. 

“There are near term margin headwind in this supply constrained environment. However, we expect it to maintain stable margin of ~26% aided by positive operating leverage. We maintain BUY Rating in the stock with revised target price of ₹4,395,” the brokerage said.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.