TCS shares fall 3% post Q3; should you buy, sell or hold the IT stock?

Shares of Tata Consultancy Services (TCS) dropped nearly 3% in opening trade on Tuesday, in sync with the broader market, a day after the company released its December quarter earnings, which fell short of D-Street estimates. According to analysts, the revenue was in line with estimates, but profit and margin failed short of expectations.

Reacting to Q3 earnings, TCS share price opened a tad lower at ₹3,290, against the previous closing price of ₹3,319.70 on the BSE. In the first hour of trade so far, the IT heavyweight declined as much as 2.53% to ₹3,231, while the market capitalisation slipped to ₹11.84 crore. In comparison, the BSE benchmark Sensex was trading 434 points lower at 60,313 levels, tracking weak cues from Asian peers.

In a seasonally-weak December quarter, the Tata Group company reported a 10.98% rise in its consolidated net profit at ₹10,883 crore as compared to ₹9,806 crore in the December quarter of 2021, led by cloud, cyber security, consulting services and enterprise application services. On a quarter-on-quarter basis, the net profit rose nearly 4% from ₹10,465 crore in Q2 FY23.

The consolidated revenue from operations jumped 19.11% to ₹58,229 crore, compared with ₹48,885 crore in the corresponding quarter of the previous fiscal. In constant currency terms, the revenue rose 13.5% year on year (YoY), led by North America and the U.K., which reported a growth of 15.4% YoY. 

Among major markets, North America and the U.K. led with 15.4% growth; Continental Europe grew 9.7%. In emerging markets, Latin America grew 14.6%, followed by India (9.1%), Asia Pacific (9.5%), and Middle East & Africa (8.6%).

The operating margin of the company declined 0.5% to 24.5% as compared to the same period last year, while net margin stood at 18.6%.

The board of directors of TCS also declared a dividend for its shareholders for the third straight quarter. The IT major has proposed to pay an interim dividend of ₹8 and a special dividend of ₹67 per equity share of ₹1 each of the company.

Here’s what analysts have to say on TCS Q3 results:

Most of the global brokerage houses have maintained cautious stance on TCS shares post its December quarter results.

Global brokerage Citi has retained its ‘sell’ rating on TCS with a price target of ₹2,990, a potential downside of nearly 10% from Monday's closing price.

Nomura has kept a 'reduce' rating on the stock with a price target of ₹2,850, citing that the near-term visibility remains low.

Another brokerage, Morgan Stanley has maintained equal-weight on the stock with a target at ₹3,350 apiece, saying that revenue beats estimates, but the margin was a miss.

According to ICICI Securities, TCS reported better than expected numbers on both revenues and margin. “The order book though has come down on sequential basis but it continued to be in the guiding range of US$7-9 billion and it also reflects the pain in Continental Europe geography. The company is not seeing any material change in demand environment commentary from what they have given in Q2 and which means that U.S. and U.K. markets likely to be resilient in the near term while Europe geography continues to see challenges due to geopolitical risks,” the domestic brokerage said in a note.

Kranthi Bathini, Equity Strategist, WealthMills Securities said the earnings came below expectations. However, there was no negative surprise in the December quarter earnings and the margin guidance stood intact, he said. “For the U.S., there is some uncertainty but the momentum is in line for the U.K. business. The majority of the revenue of TCS comes from North America and the U.K., therefore a slowdown in Europe may not impact the company going ahead. We are bullish on TCS for long-term perspective.”