UBS sets record target price for TCS, expects company to outpace peers in revenue growth; here’s why

In its recent report, global brokerage firm UBS raised the target price of Tata Consultancy Services (TCS), the largest Indian IT services company, to the highest level of ₹4,700 per share from the earlier target price of ₹4,050 per share.

The brokerage highlights that the current premium of the stock over its peers is below the historical average. It suggests that any further outperformance could lead to a re-rating, indicating confidence in the current valuation.

Historically, TCS has traded at a premium compared to other large-cap Indian IT firms. On average, this premium has been around 29%, expanding further when TCS outperforms financially.

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Currently, TCS is trading at a 16% premium to its peers, according to the brokerage. It believes this premium could increase if TCS continues to outperform in FY25. Therefore, UBS does not perceive much risk to TCS's current PE multiple of 24x on FY26 EPS.

According to the brokerage, TCS is likely to outpace its peers in revenue growth by around 100–150 basis points (bp) in FY25. It anticipates TCS to achieve 8.8% year-over-year US dollar revenue growth in FY25, compared to 4.7% in FY24, outperforming its peers' expected growth of 3.6–8.2%.

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"The growth levers that are likely to favour TCS include: the ramp-up of large deals won in FY24 till date, the potential recovery in the BFSI segment indicated by management and corroborated by global banks' commentary, increasing market share in BFSI through vendor consolidation and industry experts (ISG and Gartner), and conversations with IT services partners suggesting the return of cloud migration projects and increased IT spending in the managed services space," said UBS. 

"We believe the market is not completely taking into account the impact of the ramp-up in large deals. Furthermore, we think the potential demand recovery in FY25E will positively surprise the market in which it is not currently priced," UBS added. 

The brokerage said that clients began prioritising cost optimisation and reducing discretionary spending amid challenging economic conditions. Consequently, there was a surge in managed services contracts, benefiting IT services companies with exposure to this segment, including TCS.

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During the first nine months of FY24, TCS announced several significant deals, including the largest one with BSNL. UBS anticipates that the BSNL deal will contribute 2.5% to revenue growth, while expansions with NEST, JLR, and Aviva will add 0.8%. This is in addition to the 5.5% core revenue growth UBS expects for the company in FY25.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.