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Morgan Stanley expects TCS to Underperform

Morgan Stanley believes the share price of TCS will fall relative to the country index over the next 60 days. They expect F2Q constant-currency growth of 3.7% QoQ and 14.7% YoY (F1Q: 3.5% QoQ and 15.5% YoY) to be partly offset by a cross-currency headwind of 170bp QoQ.

Anisha Jain

Updated Oct 3, 2022, 20:25 IST

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Mumbai: Morgan Stanley believes the share price of TCS will fall relative to the country index over the next 60 days. They expect F2Q constant-currency growth of 3.7% QoQ and 14.7% YoY (F1Q: 3.5% QoQ and 15.5% YoY) to be partly offset by a cross-currency headwind of 170bp QoQ. Consequently, the USD reported revenue growth could look soft at 2% QoQ.

Additionally, they cite possibility of muted order intake (mid- to high single digits YoY), with the book to bill ratio remaining at ~1.2x. Regarding margins, as with last quarter, they see a potential for a negative surprise as costs might remain elevated on account of backfilling attrition and subcontractors. Morgan Stanley notes that TCS stock is trading at a premium of 10.9% vs. Infosys currently.

They see potential for the premium to narrow due to Infosys's continued better revenue growth performance. They estimate that there is about an 80%+ (or "highly likely") probability for the scenario.

Nifty IT is down 30% YTD as growth concerns coupled with margin pressure has led to a sharp correction in valuation multiples. For the sector, Morgan Stanley maintains their view of time/price correction for stocks with selective OWs on INFY and Tech Mover TCS within large caps and Mphasis within mid-caps. Morgan Stanley expects margin-led EPS downgrades to continue in Q2.

While QoQ growth rates should be in line/better than F1Q, they do not expect any revision to F2023 revenue guidance revision. They expect stocks to be range-bound. Furthermore, they reason that attrition rates have been sticky which would lead to margin pressures in F2Q driving EPS cuts despite steep INR depreciation vs. USD. Within mid-caps, they expect the most resilient margins (YoY) for Tata Elxsi, MphasiS and Mindtree.

To add, Morgan Stanley reasons that strongF2Q revenue growth and stable order intake numbers will not matter for the stocks since clarity on 2023 budgets would only come byearly2023 when Street F2024 growth outlook could see downside risks (we are 0.9-4.7% below consensus on F2024e).

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