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Investing.com - Rothschild Redburn initiated coverage on Tata Consultancy Services Ltd. (NSE:TCS) with a Sell rating and a price target of $22.00 on Wednesday.
The research firm cited concerns about TCS’s revenue mix, suggesting the company is unlikely to return to its pre-pandemic growth rates despite current consensus expectations. This discrepancy creates potential for a gradual derating of the stock, which currently trades at valuations similar to those seen during the cloud era.
Rothschild Redburn highlighted TCS’s consistent gross margin compression since fiscal year 2014, noting that while revenue per headcount has fluctuated between 0% and 5% growth, the rate of COGS employee expense has exceeded 15% over the same period.
The firm projects employee costs will continue to outpace revenue per headcount growth, leading to further gross margin compression over the next few years, even assuming balanced delivery between offshoring and automation.
While TCS has experienced EBIT margin decline driven by gross margin changes, the research firm acknowledged the company has moderately reduced SG&A as a percentage of sales over the past decade through efficiency improvements, a trend Rothschild Redburn expects to continue at a more moderate pace.
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