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TCS Q2 Earnings Good But Not Great?

Tata Consultancy Services Ltd.’s quarterly profit rose more than expected as India’s largest software services provider added clients and earned more from its digital services.

Moshe Katri, managing director at Wedbush Securities said the key takeaway was the ‘stability’ factor, and that does not necessarily translate into a bullish or negative outlook.

Moshe Katri, Managing Director, Wedbush Securities For the group that’s been going through multiple resets and disappointments for a couple of years now, the results are probably more positive than negative.

Bhavin Shah, founder at Sameeksha Capital, however, was disappointed due to subdued free cash flow growth. He estimates a lower-to-mid single digit growth in free cash flows, which can weigh upon the investor sentiment.

“TCS is a good option for people who are eyeing near 10 percent return on investment, but for the ones that expect greater returns, the stock might disappoint,” he added.

Leading brokerages have maintained their ratings, but hiked price targets on the stock. However, the subdued growth in revenue in constant currency terms and scattered growth trajectory across verticals led to brokerages having ‘mixed’ stand on estimates and verticals’ growth.

Here are the key takeaways from brokerage research notes:

CLSA

  • The brokerage reiterated 'Buy' on the stock, but hiked the target price to Rs 2,970 from Rs 2,880, potential upside of 16 percent.
  • The print was 'mixed' with third successive quarter of soft revenue growth in constant currency terms.
  • Strong deal wins in the U.S., banking and financial services, telecom and retail suggest near-term growth recovery.
  • Anticipated uptick in retail, insurance, digital suggest long-term potential.
  • Overall growth to accelerate fourth quarter onward.

Credit Suisse

  • Credit Suisse maintained its 'Neutral' rating, hiked target price to Rs 2,350 from Rs 2,250.
  • The impressive growth in digital exemplifies that TCS has made a smooth transition towards digital.
  • TCS is hopeful of a recovery in retail in the near-term as traditional retailers are building platforms to compete with e-tailers.
  • TCS likely to fall short of its targeted 26-28 percent margin level in FY18 due to non-digital portion dragging overall growth.

Macquarie

  • The brokerage maintained its 'Neutral' stance on the stock and hiked target price to Rs 2,375 from Rs 2,224
  • Retail segment is running at an advantage; structural headwinds faced by traditional retailers shall remain.
  • The financial years 2017-18 and 2018-19 earnings per share estimates increased to factor in 8 percent year-on-year growth in dollar revenues.

Morgan Stanley

  • The brokerage maintained 'Underweight' on TCS but hiked target price to Rs 2,250 from Rs 2,100.
  • For Morgan Stanley, the revenue growth was lower than expected and reported revenue missed estimates.
  • Retail vertical has bottomed out and going forward, the performance is expected to improve.

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