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Speed bumps to growth ahead, but will TCS’ premium to peers still sustain?

After the June quarter earnings, when red flags were raised on the sustenance of earnings growth in the wake of global uncertainties, reassured investors saying that the nature of deals are “fairly strong”.

Three months later, the word of caution spills out.

“There is that increasing sense of caution and increasing sense of uncertainty that we need to be wary about..,” said MD and CEO Rajesh Gopinathan at the post-earnings press conference on Monday. “I believe there’s space if we stay extremely close to opportunities for growth. But will we be totally insulated? Very difficult to say.”

That there are speed breakers to earnings growth is something equity market investors sensed at least a quarter before, and a reflection of this can be seen in the share performance of Tata Consultancy Services.

Shares of

have fallen more than 9 per cent during the September quarter, compared to the 3 per cent fall in peer . TCS has also lagged the Nifty 50, which has risen more than 8 per cent in the same period.

Asked if clients are sounding cautious, TCS said that clarity on the budgets will emerge in the next three months, but it acknowledged that pain points are surfacing in Europe and that long-term commitments by clients are slowing down.

No doubt, TCS saw all round growth across geographies in Q2, with the UK and Continental Europe registering more than 14 per cent growth.

But, the question is whether this will repeat in the future.

The other metrics of TCS that also suggest that the business is feeling some pressure

are deal wins and hiring.

Against a revenue growth of 4 per cent in Q2, the net hiring grew by just 1.6 per cent. Further, the TCV deal wins of US$8.1 billion were lower than the past 12-month quarterly average of US$8.6 billion, said Kotak Institutional Equities in its note.

Sustenance of premium

Given the headwinds to growth, will TCS navigate it and will its premium to peer Infosys sustain?

The optimists on the Street do believe it will sustain.

“As is always the case, TCS will comfortably outpace global IT spending. TCS’ business is well sorted,” said Kotak Equities, who believes that the company is likely to gain in the vendor consolidation exercise.

According to

, TCS’ supply-side management is better than peers, and so is its deep domain expertise.

While demand may slow down in future, TCS will likely gain share from peers, the brokerage firm said.

Most analysts believe that TCS’ superior execution metrics and better deal count across verticals will support growth.

The 12-month target prices of brokerages for TCS’ stock values it at 24-28 times its expected FY24 earnings.

Whether this premium valuation of the technology bellwether will sustain, only time will tell!

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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