Tata Consultancy Services (TCS) first-quarter missed street expectations. Dollar revenue, profit and margins came in below estimates but the deal pipeline remains strong with an orderbook of over USD 8 billion. Taking note, ICICI Securities has downgraded the stock.

Discussing the earnings fine print and rationale for the downgrade, Sudheer Guntupalli, lead analyst-technology sector said, “My belief is that industry and TCS are seeing a reversion or convergence towards pre-COVID long-term average growth rates."

The company has warned about the softness in the European market for the next one-two quarters.

"Importantly, they have also indicated that by the end of this year most inflationary spends may come back to normal including travel spends as well,” Guntupalli said.

TCS CEO Gopinathan said Europe showed lower growth but maintained that was consolidation on the back of strong growth for four consecutive quarters.

Historically, the long-term 10-15 year average valuations for TCS is in the range of 19-20, "Now it is trading almost 30 times on FY23 basis. Incrementally, given higher scope for disappointment over positive surprises, I believe the risk-reward ratio is not very favourable at this juncture and that is the reason driving our downgrade,” said Guntupalli.

The company is the first major player to have reported its numbers for the June quarter, and its peers in the software industry and other sectors will be following up later.

Meanwhile, domestic brokerage Reliance Securities has said the revenue underperformance was a one-off and welcomed the significant deal wins. It added that TCS is set to be a key beneficiary of an uptick in technology spends over the medium term.

For more, the watch video

(Edited by : Abhishek Jha)

First Published:Jul 9, 2021 2:01 PM IST