Down over 13 per cent in the last one year, flattish in the last three years (versus Nifty 50 up over 55 per cent in the same period), one might be tempted to think TCS shares might have corrected enough on a time-wise basis. All the more so especially when you see that during this period TCS’ trailing PE has fallen from 31 times in July 2022 to 25 times now. Â
But then hold still as that may not be the case. The slowdown, as reflected in Q1 results, imply investors must continue to remain cautious. Constant currency (CC) revenue growth (year on year) at negative 3.1 per cent for the quarter is no normal occurrence. It is worst since Q2FY21, but then that was the Covid era when companies took time to adjust to lockdowns (a Black Swan event). Even if you dig deeper prior to Covid, you may not find a quarter where CC revenue was this weak. A decent part of this weakness can be attributed to no follow through to the large BSNL contract in earlier year (India business declined 21 per cent in Q1).
But even otherwise, this time there is revenue weakness seen across many geographies – the US, the UK and Continental Europe. This combined with the US economic growth slowing down this year and tariff wars unresolved, challenges could persist for the next few quarters. In this context, investors need to bear in mind that the 4 per cent beat in EPS (entirely driven by non-operating items) is no succour (revenue and operating profit missed expectations by 2 per cent and 1 per cent respectively). The company has been maintaining a tight leash on costs, including delays in wage hikes, and these have supported margins to an extent. As time wears, this may also get challenging.
A ray of hope could be that despite CEO Krithivasan noting delays in decision making by clients intensified in Q1, he also reiterated his expectation from prior quarter that international business (94 per cent of revenue) will fare better than last year. However as mentioned above, there are many global economic challenges that will pose speed bumps to this and investors must view this cautiously.
What should investors do
In our update after Q4FY25 results in April this year, we had noted that while valuation froth is out in TCS, it is not yet a buy. Our view remains unchanged after Q1 FY26 results also. The way things are trending, the three-year period ending FY26 will be the weakest three-year period for TCS on record. Global economic challenges apart, industry structure may also be changing in an AI world, and TCS may have to revisit payout ratios/increase investments to ensure better and sustainable growth.
We had first recommended investors to book profits in TCS in January 2021. Since then TCS shares are up a mere 2 per cent, while Nifty is up 76 per cent.
Published on July 10, 2025