UBS: TCS Shares Surge to Rs 4,700, Market Ignores Key Factor

UBS highlights that despite TCS’s shares reaching Rs 4,700, the market isn’t fully considering the potential effects of significant deal expansions and the possibilities for margin improvement.

UBS has upgraded Tata Consultancy Services Ltd (TCS) to a ‘Buy’ rating, raising the target price to Rs 4,700 from Rs 4,050. The decision reflects UBS’s confidence in TCS’s resurgence as a leader in the IT sector. UBS believes that the market is overlooking TCS’s potential to outperform its peers in sales growth by 100-150 basis points. Additionally, UBS expects TCS to demonstrate margin improvement in FY25, further bolstering its outlook.

UBS highlights that the market underestimates Tata Consultancy Services Ltd’s (TCS) potential for margin improvement due to large deal ramp-up and operational enhancements like utilization optimization and pyramid restructuring. UBS suggests that the market could witness positive surprises in TCS’s margin expansion in upcoming quarters.

UBS upgrades Tata Consultancy Services Ltd (TCS) to a ‘Buy’ rating, noting the market’s failure to price in superior revenue growth despite a divided consensus. TCS shares surged by 2.19% to reach Rs 4,088.10 following the upgrade. The brokerage suggests that TCS has been undervalued relative to its peers and expects a potential upside due to its superior growth prospects.

UBS highlights that Tata Consultancy Services Ltd (TCS) currently trades at a multiple premium over peers, which is below its historical average. The brokerage suggests that any future outperformance by TCS could lead to a re-rating, offering comfort in using the current multiple.

UBS anticipates that Tata Consultancy Services Ltd (TCS) could surpass its peers in revenue growth for the fiscal year 2025. This forecast is based on several factors including the scaling up of large deals, the resurgence of the BFSI segment, success in securing managed services contracts, and the anticipated resurgence of cloud and discretionary spending, as indicated by conversations with IT partners.

UBS expresses optimism regarding Tata Consultancy Services Ltd (TCS), foreseeing it as a primary beneficiary of ongoing trends and potentially outperforming its peers. The brokerage anticipates strong revenue growth supported by management’s cost rationalization initiatives, likely leading to operating margin expansion. UBS notes TCS’s success in securing multiple large deals in the managed services sector, the gradual ramp-up of which is expected to contribute to revenue growth.

According to a foreign brokerage, third-party consultants are signaling potential improvements in IT spending for managed services and As-a-Service models in 2024.

The foreign brokerage highlights positive indicators for Tata Consultancy Services Ltd (TCS), citing a resurgence in venture capital (VC) funding in the fintech sector, which is closely linked to tech spending in banking, financial services, and insurance (BFSI).

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