JPMorgan upgrades TCS to 'overweight,' raises target price by 4%
What's the story
Tata Consultancy Services (TCS) has received an upgrade from brokerage firm JPMorgan. The firm has changed its rating on the stock from "neutral" to "overweight," and raised its target price by 4% to ₹3,800 per share from ₹3,650. This implies a potential upside of 24.4% from Friday's closing price of ₹3,054.7 per share.
Market analysis
TCS has underperformed Nifty, Nifty IT indices this year
JPMorgan noted that TCS has underperformed the Nifty index by 29% and the Nifty IT index by 6% this year. This is mainly due to lower-than-expected growth and narrowing margins. However, despite these challenges, the brokerage firm doesn't believe that TCS's business model is broken. It expects a recovery in growth from the second half of FY26.
Financial outlook
Brokerage lowers growth estimates for FY26, FY27
JPMorgan has lowered its international constant currency and year-on-year (YoY) growth estimates for TCS to 0% and 5%, respectively, in FY26 and FY27. However, it expects an increase in margin estimates by 55 basis points and 57 basis points in FY26 and FY27, respectively. This could lead to a 2% to 3% earnings-per-share (EPS) upgrade over the next three years.
Market valuation
TCS shares trading at 2 standard deviations below average
JPMorgan highlighted that TCS shares are currently trading at a price-to-earnings ratio of 19.7 times their two-year forward earnings, which is two standard deviations below the five-year average. The firm's one-year forward free cash flow is at 4.5% with dividend yields at 3.8%. This suggests that the stock may be undervalued in relation to its future earnings potential and cash flow generation capabilities.
Financial performance
What do the latest numbers indicate?
In the June quarter, TCS's constant currency revenue fell by 3.3% sequentially. The company's revenue fell 1.6% to ₹63,437 crore, while in US dollar terms it was down 0.6% sequentially. Of the 51 analysts covering the stock, 34 have given "buy" ratings, 12 have "hold" ratings, and five have assigned "sell" ratings. This indicates a mixed sentiment among market experts about TCS's future performance in the stock market.