TCS Shares Fall Nearly 3% After Disappointing Q2 Earnings

On 11 October, Tata Consultancy Services or TCS shares dipped almost 3% after the company reported underwhelming earnings for the September quarter. Weak operational performance, shrinking margins and limited signs of recovery were the key concerns.

By 11:35 AM, TCS share price were down by 2.3% trading at ₹4,132. So far this year the stock has gained nearly 10% but it’s lagging behind the Nifty 50 which is up 15%.

Mixed Performance Across Markets

Geographically, TCS’s growth was primarily driven by the Indian market which surged over 21% QoQ. However UK and Europe markets posted modest gains of 2.8% and 3.6% respectively impacted by some client specific issues. On the downside North America and Latin America saw declines of 1.7% and 3.2% QoQ raising concerns about demand recovery. North America in particular is a critical region for TCS accounting for almost 50% of its revenue in any given quarter.

Sanjeev Hota Head of Research at Sharekhan by BNP Paribas commented on the weak numbers saying While the revenue miss was slightly below estimates the performance on margins surprised us negatively.

Following the results brokerage firm Nuvama has trimmed its earnings forecasts for TCS. It cut the company’s earnings per share estimates for FY25 and FY26 by 4.9% and 3.9%, respectively. Additionally, Nuvama revised its target price for the stock to ₹5,100 from ₹5,250, signaling a potential upside of 22% from the current price.

Q2 FY25 Financials: Profit Falls, Margins Shrink

TCS reported a 1% decline in consolidated net profit for Q2 FY25 coming in at ₹11,909 crore which missed analyst’s expectations. The company's operating margin declined to 24.1% in the September quarter further contributing to the weak results.

One of the major contributors to TCS's recent growth has been the BSNL deal. However, Nuvama expects its contribution to reduce from Q4 FY25 although they believe growth in other areas will help offset this. On a positive note Jefferies pointed out that BSNL deal ramp down could actually improve margins moving forward.

Outlook for FY25 Remains Positive Despite Challenges

Despite the current challenges, TCS management remains optimistic about FY25 particularly in the BFSI sector which is showing signs of recovery. Ashutosh Sharma, Head of Forrester Research India noted that with potential interest rate cuts from US Federal Reserve in the near future, discretionary spending in 2025 is likely to rise making it a better year for TCS and the overall industry compared to 2024.

Nirav Karkera, Head of Research at Fisdom echoed these sentiments. He acknowledged that while the margin miss this quarter was surprising, TCS continues to benefit from broader positive trends such as growing demand for generative AI and digital transformation projects.

Talent and Dividends

In terms of workforce growth TCS added 5,726 employees in the quarter bringing its total headcount to 612,724. The board also declared an interim dividend of ₹10 per share underlining the company's commitment to rewarding shareholders. TCS has also started campus hiring for FY26 reflecting its focus on long term growth.

Conclusion

TCS is currently trading at a price to earnings ratio of 29.9 for FY25E, 26.9 for FY26E and 24.4 for FY27E based on consensus earnings estimates. Despite the weaker than expected results for this quarter the company remains confident in its ability to navigate the challenges ahead driven by its strong presence in key verticals and markets.