Tata Consultancy Services (TCS), a global IT giant and a cornerstone of India’s technology sector, has been assigned a ‘NEUTRAL’ rating by Kotak Institutional Equities, accompanied by a revised target price of Rs3,800. The report reflects a cautious outlook despite TCS’s commanding market position, consistent dividend policy, and formidable brand equity. Kotak’s concerns are anchored in soft revenue growth, structurally challenged margins on large deals, and relatively rich valuations. The brokerage signals a more attractive investment opportunity in select mid-tier IT stocks that offer superior growth and risk-adjusted returns.

Revenue Momentum Remains Tepid

Kotak underscores a lack of vibrancy in TCS’s revenue growth trajectory. Although broader IT demand appears to be stabilizing, TCS’s Q4FY24 constant currency revenue growth of 1.1% quarter-on-quarter and 3.5% year-on-year fell short of historical performance and peer benchmarks. This continued sluggishness in topline momentum remains a key concern in the firm’s investment thesis.

Elevated TCVs Mask Margin Headwinds

The company’s total contract value stood at USD13.2 billion for Q4FY24, with USD1.5 billion attributed to mega deals. While this suggests robust deal activity, Kotak flags concerns about pricing dynamics. Many of these contracts stem from vendor consolidation—typically accompanied by steep price concessions and thin margins. Consequently, while order inflows remain strong, they are not translating into margin expansion.

TCS’s operating margin for FY24 was 24.6%, stable yet below pre-pandemic levels. Kotak remains cautious on further expansion given the current deal mix and execution challenges.

Talent Utilization and Bench Optimization Remain Key

TCS continued rationalizing its workforce in Q4FY24, with a sequential decline of 1,759 employees. Utilization levels, excluding trainees, have improved, pointing to tighter deployment practices. Attrition has cooled to 12.5%, which supports operational stability.

However, Kotak points out that the scope for further optimization is limited. As utilization approaches its natural ceiling, any incremental gains in margins may be marginal.

Vertical-Specific Commentary Reveals Mixed Trends

Segment-wise results revealed uneven trends. Revenue from North America, a critical geography, contracted 0.3% QoQ, affected by softness in BFSI and Retail. Meanwhile, the UK business grew 1.4% sequentially, reflecting strength in transformation projects.

Verticals such as Manufacturing and Energy posted healthy growth, but Communications and Hi-Tech underperformed. This patchy performance across industries underscores the challenges of broad-based growth in the near term.

Strategic Focus on Mega Deals Comes at a Cost

Kotak expresses caution over TCS’s increasing reliance on mega deals. While these engagements support revenue visibility, they often come with lower profitability due to pricing pressures and operational complexity.

These large-scale contracts also bring execution risks, especially in fast-evolving digital transformation initiatives. Though they appear attractive on paper, they may not yield the desired margin benefits.

Valuation Still Rich Relative to Growth Potential

Kotak argues that TCS’s current valuation—at 26.1 times FY26 estimated earnings—is stretched when compared with its growth and margin outlook. While the stock commands a premium for its brand, balance sheet strength, and legacy, its relative underperformance against nimble mid-cap peers questions the justification for such a high multiple.

The fair value derived via DCF methodology is pegged at Rs3,800, suggesting a limited upside from the stock’s current trading range. As a result, Kotak maintains its cautious stance.

Financial Snapshot: Stability but No Spark

The numbers reflect a healthy balance sheet and shareholder returns, but the absence of accelerating earnings or margin expansion tempers the enthusiasm for new positions at current price levels.

Technical View: Range-Bound Price Action Likely

TCS is currently trading within a well-defined channel between Rs3,350 and Rs3,650. Lacking a clear fundamental trigger, the stock is likely to oscillate within this band in the near term. A breakout above Rs4,100 or a breakdown below Rs3,300 would be necessary to change the market’s tone decisively.

For now, the technicals suggest a wait-and-watch approach, particularly for investors considering fresh entry points.

Investor Strategy: Accumulate on Dips, Not at Peak

TCS continues to be a preferred choice for long-term portfolios, but Kotak advises restraint at the current valuation. Given muted earnings growth and flat margins, the stock lacks the fundamental triggers to support re-rating.

Target Price: Rs3,800
Current Price: ~Rs3,400
Rating: NEUTRAL
Support Level: Rs3,650
Resistance Level: Rs4,050

Investors should consider accumulating on meaningful corrections rather than chasing rallies, especially in light of better-positioned alternatives in the mid-cap space.

Bottomline: A Pillar of Stability, Not Growth

Tata Consultancy Services remains a pillar of consistency in the Indian IT landscape. Yet, as Kotak Institutional Equities outlines, stability comes at a premium, and growth prospects appear uninspiring in the near term. While the stock will continue to anchor many portfolios, particularly for dividend-seeking investors, it does not currently offer a compelling entry point for growth-oriented capital.