900% Dividend, Buyback Offer; TCS Shares Fall 2% After Q2, Concerns On Near-Term Risks; Buy Or Sell?

The Q2 results of Tata Consultancy Services (TCS) left a bitter taste for investors as they dumped this tech giant stock on Thursday as much as the heavyweight has nosedived 2%. TCS financial performance was a mixed bag in Q2FY24, with the top-line front missing Street's expectations while profits and EBIT margin came as good. Investors' concern is in regards to the near-term challenges in terms of IT spending which has soured their sentiments for TCS. The company is expected to have between muted to disappointing FY24 but does not dent hopes for a better FY25.

On BSE, in early trade, TCS shares touched an intraday low of Rs 3,546 apiece on Thursday, declining by 1.8% from the previous session. In the early deals, TCS also erased its critical market valuation of Rs 13 lakh crore and touched a m-cap of over Rs 12.97 lakh crore at the intraday low.

However, at the time of writing, the stock traded near the day's low at Rs 3,553.40 apiece, lower by 1.5%. Its m-cap is struggling a little over Rs 13 lakh crore currently.

Overall, TCS lost an m-cap of Rs 23,777.83 crore in the early session of Thursday. On the previous day, the m-cap stood at nearly Rs 13.21 lakh crore.

TCS Q2 Results:

The IT player registered a consolidated net profit of Rs 11,342 crore, which is attributable to the shareholders of the company, registering single-digit growths of 2.4% QoQ and 8.7% YoY. Noteworthily, TCS' dollar revenues declined sequentially for the first time in 17 quarters. In constant currency, the revenue growth came in at 2.8% YoY.

TCS posted EBIT of Rs 14,483 crore, up by 2% sequentially, while EBIT margin expanded by 70 bps to 24.3% in Q1FY24. Notably, margin expansion drives EPS growth of 8.7% YoY.

The company's BFSI segment growth contracted by 0.5%, while Communications and media dipped by 2.1% and Technology and services declined by 2.2%.

TCS Buyback:

The Tata Group-backed flagship company received board of directors approval for the proposal of buyback of up to over 4.09 crore equity shares for an aggregate amount of Rs 17,000 crore. The buyback size represents 1.12% of the company's total paid-up equity share capital.

TCS fixed the buyback price of Rs 4,150 per share, which is at a premium of nearly 15% from the current market price of Rs 3,610.20 per share on BSE by the end of the October 11th trading session.

TCS Dividends:

TCS is back with yet another reward for shareholders. The top large-cap stock in the IT sector has recommended a second interim dividend of Rs 9 per share having a face value of Re 1 each for the financial year 2023-24. In percentage, the dividend payout is 900%.

For the second interim dividend, TCS has already fixed October 19, 2023, as the record date to determine eligible shareholders, while the payout is expected on Tuesday, November 7, 2023.

For FY24, the company paid the first interim dividend to the tune of 900% amounting to Rs 9 per share. Overall, in FY23, TCS paid an eye-bulging 11,500% totaling Rs 115 per share.

Buy Or Sell TCS Shares After Q2 Results?

According to Motilal Oswal, overall, client engagement remained strong and TCS continued to chase multiple opportunities, as seen in robust deal wins in 2Q. However, macro uncertainties continued to weigh on client spending in discretionary areas, resulting in tepid near-term growth expectations. Additionally, the company witnessed the closure of a few large projects during the quarter, which further impacted its performance.

Further, Motilal highlighted that TCS management has indicated that client spending remains muted in the near term, it is seeing definite signs of macro recovery and improvement in client engagement over the medium term. Given the continued uncertainty in the demand environment in FY24, we have cut our estimates (partially offset by an accelerated revenue conversion of the mega BSNL deal).

The brokerage's note said, "We continue to expect TCS to deliver superior growth in FY25 among our Tier 1 coverage, driven by its leadership in cost efficiency, which has led to strong deal inflows in recent quarters. We expect the trend to continue, providing better visibility for FY25 revenue growth despite an uncertain demand environment. We factor in a USD revenue CAGR of 7.6% over FY23-25E."

Also, with a sharp recovery in 2Q EBIT margin performance, Motilal's note said, "TCS should benefit from its scale and ability to optimize talent to control costs in the near to medium term. This is especially visible in the fact that it has given timely increments despite growth concerns, which we expect to pay out over the medium term
through easing attrition. This should allow it to deliver a 12.2% PAT CAGR over FY23-25E."

"We have trimmed our FY24/FY25 EPS estimates by 0.7%/1.8%. Our TP of Rs 4,060 implies 28x FY25E EPS (12% upside). Reiterate BUY on the stock," the brokerage added.

In the second half of FY24, Kotak Institutional Equities said, that 2HFY24 will shape up to be better than 1HFY24 aided by deal wins. The outlook on discretionary spending continues to be weak in the near term. It believes CY2024 budgets can provide first glimpses into demand in FY2025.

Kotak's note added, "TCS expects normal furlough impact in 3QFY24. These will take 2-4 months to get finalized. We expect revenue growth for TCS to accelerate to 11.1% in FY2025 from 5.1% in FY2024 on the back of (1) higher contribution from mega deals- BSNL will contribute 2.5% to FY2025E revenues, (2) higher contribution from cost take-out opportunities and (3) better discretionary spending, especially in BFSI and hi-tech aided by reduced leakages in existing revenues."

On the valuation, Kotak said, "TCS has balanced exposure toward both run and change spends as well as capabilities and scale to address opportunities from both cost take-out and innovation agendas of clients. We like the business
model and execution prowess. Most of the positives are baked in the stock price, limiting significant near-term upside from current levels. We tweak assumptions a tad, leading to a ~1% cut to our FY2025-26 EPS estimates. We value TCS at 24X September 2025E earnings, leading to an unchanged FV of Rs3,760. Maintain ADD."

Additionally, Axis Securities said, "The growth rate may slow down in FY24 due to uncertainties in the world's
largest economies. However, supply-side constraints are easing up, which will help the company gain some margin expansion in the near term. H2FY24 may see some revision on the demand side. The industry's and the company's long-term outlook remain robust."

With a strong deal pipeline and increasing demand for newer technologies, Axis Securities believes TCS will demonstrate a quicker recovery in FY25E. Hence, the brokerage maintains its HOLD rating on the stock for a target price of Rs 3,790/share.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.