BNP Paribas has maintained its ‘Buy’ rating on TCS stock, albeit cutting its previous target price by about 2%, after the Tata group company reported fiscal first quarter earnings that meet expectations. Tata Consultancy Services Q1FY24 results were mainly driven by robust order book, longer-term demand prospects, and the potential benefits from Generative AI (GenAI). BNP Paribas has put a target price of Rs 3,960 on TCS stock, implying a 21.5% upside. TCS stock closed at Rs 3,344 on Thursday, up 2.6% from the previous close.
TCS results: Where is the growth coming from
BNP Paribas said that while TCS’ constant currency revenue growth on-quarter missed its estimates mainly due to cautious client spending on technology; the results were largely in line with the consensus expectations. TCS highlighted that customers have been re-evaluating tech investments, particularly where the return on investment (RoI) was low. Despite not indicating the timing of a demand recovery, TCS expressed optimism about the opportunities presented by Generative AI (GenAI) and its multiple proof of concepts currently in progress. With approximately 100 opportunities in the pipeline, TCS expects to benefit from GenAI’s new use cases and increased productivity.
In the first quarter of FY24, TCS’s CC revenue remained flat on-quarter, while the EBIT margin fell 132 basis points to 23.2%. This decline was primarily attributed to wage hikes offsetting operational efficiencies. TCS recorded a slight increase in headcount (0.1% q-q and 1.5% y-y), and attrition decreased by approximately 230 basis points q-q.
Geographical distribution of TCS earnings
Geographically, TCS witnessed solid revenue growth in the UK (+4.9% q-q USD, +16.1% y-y CC), while North America reported muted growth (-0.3% q-q USD, +4.6% y-y CC). APAC (-2.1% q-q USD, +4.7% y-y CC), Continental Europe (-0.9% q-q USD, +3.4% y-y CC), and India (-1.6% q-q USD, +14% y-y CC) experienced declines. Among verticals, revenue growth in USD was decent for Retail (+1.1%), Manufacturing (+3.5%), Life sciences (+1.4%), and Regional Markets (+1% q-q). However, it was weak for Telecom (-1.1%), Technology (-0.7%), and BFSI (-0.8%). TCS declared an interim dividend of INR 9 per share.
TCS stock valuation
BNP Paribas believes that the short-term risks associated with TCS are already reflected in the stock’s valuation, trading at around 22x FY25E P/E, which is below the last five-year average NTM P/E of approximately 26x. Following the analysis of the first quarter results and management commentary, BNP Paribas slightly adjusted its earnings per share (EPS) estimates for FY24-26E by 2-3%, resulting in a slight reduction in the target price based on a discounted cash flow (DCF) valuation method.
Despite the near-term uncertainties, BNP Paribas maintains TCS as its top pick, anticipating a demand recovery and potential revenue market share gains for the company in a cost-focused demand environment.