TCS rallies 5%, hits a fresh record high
Shares of Tata Consultancy Services (TCS) rallied 5 per cent to Rs 2,649.95 on the BSE in the early morning trade on Monday after the company said it will consider a buyback on Wednesday, October 7, 2020. The stock of the Tata group IT bellwether surpassed its previous high of Rs 2,554, touched on September 22, 2020.
In a separate regulatory filing, TCS said it would be providing Rs 1,218 crore as an exceptional item, in the financial results for the three and six months ended September 30, 2020, to be announced on October 7, 2020. This provision is for court-awarded legal claims made in the matter regarding Epic Systems Corporation. TCS has made this provision as a matter of prudence and the case is still being pursued by both parties.
ICICI Securities believes that TCS has the potential to do a buyback of Rs 20,000 crore, which is around 2 per cent of its market capitalisation.
Meanwhile, the brokerage firm expects TCS to report improving growth in the coming quarters, mainly led by receding challenges on the supply side, the ramp-up of deals, vendor consolidation opportunities, and traction in banking, financial services, and insurance (BFSI). The company also expects cloud, customer experience, automation, and cybersecurity-related digital technologies to gain traction in the long term. “We believe TCS could see a decline in FY21E revenues mainly due to a weak first quarter,” the brokerage added.
However, the brokerage firm expects the company to register healthy growth in FY22E, mainly led by the ramp-up of deal pipeline and acceleration in digital technologies. With the company’s knack of winning large deals across segments and geographies, strong execution, cost rationalisation, and client mining capability, it has been able to register a consistent performance in revenues and margins. TCS has best in class margins (nearly 27 per cent EBITDA margins) and returns on capital employed (RoCE) (nearly 44 per cent).
“We expect the company to continue delivering industry-leading growth and higher return ratios in the coming years. Further, the company has maintained a healthy cash flow generation and has a consistent dividend payout policy. Hence, we remain positive on the stock from a long-term perspective,” ICICI Securities said in a recent note. It has set the target price of Rs 2,650 per share.