TCS watchful to Brexit like external challenges; Nomura prefers Infosys, HCL Tech

As Brexit – a term referred for Britain exit from the European Union after June 23 referendum- nears, a few Indian companies, including couple of Tata companies will be in focus due to their exposure to the UK. TCS during company’s Annual General Meeting (AGM) said “regarding external challenges like Brexit, no impact has been felt to date, and the company is watchful; while on the IP infringement case with EPIC the company is hopeful of a quick resolution, expects the judgment this month and believes it is not at fault.”

Japanese brokerage firm Nomura after the AGM has maintained its ‘Neutral’ rating on TCS shares with a target price of Rs 2,415. The stocks of the company were at Rs 2,655.70 on Monday.

The brokerage house said that the company is sounding assured on near-term demand and has reiterated margin guidance. TCS sounded assured on growth and reiterated its FY17 operating profit margin guidance of 26-28 per cent, which would be driven by scale leverage, despite 4QFY16 margins at the lower end of its guided band and impending wage hikes in 1Q. The company sounded positive on BFSI demand (similar to Infosys) and did not indicate any caution in areas like Healthcare/Retail, something that Infosys warned about recently, but its commentary was at odds with positive commentary from Infosys on telecom, wherein TCS continues to believe that telecom remains a sector with a structural issues and is likely to grow slower than the company average.

Also Read

Share Market Highlights: Sensex, Nifty ends lower! Nifty settles near 22,000, Sensex below 72,500, Media stocks top laggards

Tata Investment hits 5% lower circuit for tenth consecutive day; Wipes off market cap by more than Rs 20,000 cr

Stocks To Watch: Jindal Stainless, Bharti Airtel, Tech Mahindra, JSW Energy, Wipro, ICICI Securities

Why have mid and small cap stocks seeing selling in the last month? Is it a response to SEBI warning on ‘froth in market’?

The brokerage remained cautious of TCS achieving double-digit growth in the ongoing financial year in light of weak exit growth of around 8 per cent y-y in 4QFY16, risks to its margin guidance, with company commentary suggesting to likely targeting of the lower end of the band, and valuations at nearly 19 times of 2017-18E for dollar revenue CAGR (compounded annual growth rate) of 10 per cent and EPS CAGR of 7 per cent over FY16-18F.

Nomura prefers HCL Technologies and Infosys over TCS. While maintaining ‘Buy’ rating the brokerage house has target price of Rs 950 for HCL Tech and Rs 1315 for Infosys.