Jefferies and CLSA on Wednesday maintained their ‘buy’ rating on Tata Consultancy Services (TCS) after the country's biggest software services company posted better-than-expected quarterly earnings, but the brokerages cut their price targets after TCS' operating margin contracted in the three months ended June 30.

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Jefferies reduced the price target to Rs 2,380 from Rs 2,400 while CLSA cut its target to Rs 2,570 from Rs 2,650.

Jefferies, in its research report, said, “TCS’ Q1 revenue growth of 1.6 percent QoQ in USD terms disappointed v/s our expectations of 2.6 percent with BFSI and retail, the key verticals that missed. EBIT margin at 24.2 percent was also 30bps (basis points) lower than our expectation, and slipped 90bps QoQ mainly on account of wage hikes taken from 1st April and INR appreciation. Net profit though was ahead of our estimate helped by high treasury income and lower tax rate.”

One basis point is one-hundredth of a percentage point.

It further said that the company’s deal wins have remained strong, keeping them optimistic on the double-digit growth for FY20E.

TCS on Tuesday, reported a 10.8 percent year-on-year (YoY) jump in net profit at Rs 8,131 crore for the first quarter ended June 2019.

In the June quarter, TCS saw a contraction in operating margin, which is a key indicator of the financial performance of an IT company, due to wage hike, strong rupee against US dollar, high attrition and visa costs.

While cutting the price target, Jefferies maintained its price target because as per the brokerage, "TCS remains the best placed amongst top tier IT services companies to deliver strong revenue growth and margin. This along with high free cash flow/dividend yield and sector leadership should support its valuation premium."

Meanwhile, CLSA also cut its price target due to margins fall which was a result of sub-contracting costs, wage hikes, and forex headwinds.

“Management maintained guidance of >10% CC growth in FY20, which is driving accelerated graduate hiring and on-boarding in 1HY20. However, the margin trade-off, led by talent scarcity, is more controllable, particularly as TCS builds local scale and drives scaled distributed/offshore agile. We moderate margins by 30bps over FY20-21," it said in a report.

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