Religare Research maintained 'Buy' on Tata Consultancy Services (TCS) with target price of Rs 2,860 in its report.
Commenting on the investment rationale, the stock broker said, "Geographically, Europe (ex-UK) and India will be strong, while the US would be in line with company expectations. Within verticals, retail, manufacturing and hi-tech are being hit by shutdowns, while insurance is showing higher thanexpected weakness. Further, sharp Euro and GBP movements against the USD will pull down USD revenue growth by 220bps QoQ. Overall, we expect TCS to see 1.5% QoQ USD revenue growth, below expectations."
"While there are no project deferments so far, the sentiment is softer than same time last year. Select smaller verticals are seeing traction but large verticals will be a drag. While energy is stable so far, weakness in oil prices could weigh on the vertical. Realisations however could see some uptick led by mix shifts.
Operationally, management expects Q3 margins to remain flat, though there could be some benefits due to FX movements. Overall, management maintained its near-term operating margin target of 26-28%. While forex gains would be higher in the quarter, treasury income is likely to be lower."
Weak commentary is a negative surprise for the street and will weigh on the stock in the near term. "We cut our FY15/FY17 EPS estimates by 1.5%/1% to factor in a weaker Q3 and the FX impact. We expect TCS to still grow ahead of industry, and valuations at 16.5x FY17E are reasonable. Clarity on CY15 budgets and commentary on FY16 will be the key share price drivers," Religare added.
