Should you invest in TCS shares post-Q1 results?

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Brokerages retained a bullish view on Tata Consultancy Services (TCS) after its reported a 28.5% growth in June quarter net profit at Rs 9,008 crore, and called out the domestic business as a drag which restricted its overall growth because of the second wave of Covid-19.

Shares of the company traded 0.85% lower at Rs 3229 in the morning trade on Friday, while the benchmark BSE Sensex was down 238 points, or 0.45%, at 52330.

The company, a cash cow for the over $100 billion Tata group, said the June quarter results were a tale of two contrasting trends of healthy growth in core markets like the US and segments like banking, and the domestic business being a drag.

TCS’s overall revenue stood at Rs 45,411 crore, up 18.5% as compared to the year-ago period and 3.9% higher than the March quarter.

Should you buy?

Commenting on the quarterly results, YES Securities said that TCS is well on track to post double-digit revenue growth for FY22/FY23 and expected to sustain FY21 EBIT margin of around 26% for FY22 led by favourable business mix and operating leverage.

“Free cash flow generation will remain strong with limited reinvestment requirements and that should help to sustain dividend payout. It trades at PE of 27.6x on FY23E earnings,” the brokerage said adding it has maintained ‘Buy’ rating on TCS with an unchanged target price of Rs 3,600.

On the other hand, Sharekhan added that TCS disappointed by reporting a slightly weaker-than-expected performance on the revenue, EBIT margin and net profit fronts. This was because of a sharp fall in revenues of the India business as the second wave of Covid-19 hit hard.

“Q1FY2022 headline numbers slightly missed estimates. However, TCS saw healthy deal TCVs (total contract value), broad-based growth across core verticals, growth in major markets, client additions across bands and higher cash conversion,” Sharekhan said. The brokerage has fixed a target price of Rs 3,750 for the IT major.

Emkay Global Financial Services retained ‘Hold’ call on the IT major with a price target of Rs 3,500. “We lower our FY22/23/24 EPS estimates by 1.3%/0.1%/0.1%, after factoring in Q1FY22 revenue miss. TCS is well-positioned to benefit from the strong demand environment, acceleration in cloud adoption and digital transformation opportunities. However, revenue miss and rich valuations will weigh on stock performance,” it said.