In my previous article on TCS written last month (Click Here for it), I had highlighted the fact about the company's growth clearly showing signs of slowing. Growth in Q4 was slightly more worse than in Q3. TCS's Total Income has posted a growth of 13.85% in Q4, which was helped by a 60% increase in the Other Income. This growth was lower than 14.42% posted in Q3 and 16.84% posted in Q2. The EBITDA numbers for Q4 are not directly comparable as the company has doled out a one-time bonus worth Rs.2600 crores for it's employees who have been with the company for 1 year or more. The Bonus is huge as the average payout per employee comes out to around Rs.90,000/-, with the older ones getting larger sums & newer ones getting smaller sums. The Bonus is 1 week's salary for every year of service completed with TCS.
( Click Here for TCS' Results Summary Page. )
Look at the chart. The T-T-M growth has sharply slowed down in the last 3 quarters. The T-T-M Total Income growth has dropped from 30+% level in June'14 to just about 17% in March'15. Going by the growth numbers in the last 3 quarters, the T-T-M growth number could drop further for the next 1 or 2 quarters. This is bad news for the company's valuations. The stock has been trading at premium valuations, which it deserved because TCS was posting superior growth until June'14 quarter. In the last 6-7 months, the TCS stock price has approached the Rs.2800 mark twice, but failed to breach it. At the Rs.2800/- level, the P/E ratio of the stock stood at around the 28-30 region then. As the company was posting growth in excess of 25%, we could say that it deserved it. But now that the growth has slowed down to well under 20% level, the P/E ratio should come down as well.
As we can see, the TCS stock was trading very close to it's crucial support levels until yesterday. With today's fall, the stock has dipped just below those support levels. Now it's very important to see if it sees some kind of bounce. But there is slightly higher chance that we could see the stock correcting further in the coming months. The correction could be gradual, with intermittent bounces, but the next few months are going to be down or range-bound movement for TCS stock. I am expecting the TCS stock to come down to P/E ratio of around 20 and maintain that, until the company starts posting a better growth rate of 20% or more again. At the current EPS of around Rs.102/-, the 20- P/E ratio level comes to about Rs.2000-2050 levels. Excluding the bonus impact, the EPS would have been about Rs.110-112. So the 20-P/E fair value would then come to about Rs.2200-2250 levels. But we need to keep an eye on upcoming quarterly results. The growth numbers are crucial. If TCS continues to post growth slower than 15% levels, we cannot ignore the possibility of the stock getting de-rated further.
( Click Here for TCS' Results Summary Page. )
Look at the chart. The T-T-M growth has sharply slowed down in the last 3 quarters. The T-T-M Total Income growth has dropped from 30+% level in June'14 to just about 17% in March'15. Going by the growth numbers in the last 3 quarters, the T-T-M growth number could drop further for the next 1 or 2 quarters. This is bad news for the company's valuations. The stock has been trading at premium valuations, which it deserved because TCS was posting superior growth until June'14 quarter. In the last 6-7 months, the TCS stock price has approached the Rs.2800 mark twice, but failed to breach it. At the Rs.2800/- level, the P/E ratio of the stock stood at around the 28-30 region then. As the company was posting growth in excess of 25%, we could say that it deserved it. But now that the growth has slowed down to well under 20% level, the P/E ratio should come down as well.
As we can see, the TCS stock was trading very close to it's crucial support levels until yesterday. With today's fall, the stock has dipped just below those support levels. Now it's very important to see if it sees some kind of bounce. But there is slightly higher chance that we could see the stock correcting further in the coming months. The correction could be gradual, with intermittent bounces, but the next few months are going to be down or range-bound movement for TCS stock. I am expecting the TCS stock to come down to P/E ratio of around 20 and maintain that, until the company starts posting a better growth rate of 20% or more again. At the current EPS of around Rs.102/-, the 20- P/E ratio level comes to about Rs.2000-2050 levels. Excluding the bonus impact, the EPS would have been about Rs.110-112. So the 20-P/E fair value would then come to about Rs.2200-2250 levels. But we need to keep an eye on upcoming quarterly results. The growth numbers are crucial. If TCS continues to post growth slower than 15% levels, we cannot ignore the possibility of the stock getting de-rated further.
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