On Friday, UBS adjusted the price target on Tata Consultancy Services Ltd. (NS:TCS:IN) to INR4,750 from the previous INR4,850, while continuing to endorse the stock with a Buy rating. This change comes as TCS shares have seen a 9% decline over the past month, in contrast to the relatively stable performance of industry peers Infosys (NS:INFY) and HCL Tech.
UBS commentary highlighted that the market has likely factored in TCS’s weaker third-quarter performance. However, the management’s positive outlook suggests a potential growth uptick in the fourth quarter and beyond, excluding the effects from the BSNL deal. The analyst emphasized that the market might overlook the growth drag as the BSNL deal tapers off.
The UBS analyst remains optimistic about TCS’s prospects, noting that its valuation is on par with Infosys and HCL Tech, and anticipates similar earnings growth. This expectation is supported by potential margin expansion as the BSNL deal winds down, which should lead to improved financial metrics. Additionally, TCS is set to offer a special dividend of Rs76 in the first week of February.
The company reported a large total contract value (TCV) of $10.2 billion in the third quarter, marking an increase of 19% quarter-over-quarter and 26% year-over-year. This included a higher share of discretionary and shorter-cycle deals, bolstering the analyst’s positive stance. UBS analysis of the deal conversion ratio also suggests a stabilization, potentially indicating that the first half of the year could represent the lowest point.
In conclusion, despite the softer performance in the third quarter, UBS maintains its Buy rating on TCS stock, with the belief that the market will perceive more positives than negatives in the company’s outlook going forward.
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