TCS' Q3 Lackluster Compared With Expectations as Labor Market Moderates Results; Shares Overvalued

Wide-moat Tata Consultancy Services' third quarter was disappointing, as revenue came in significantly below our expectations and operating margins just under our expectations. Turnover impact proved to be even greater in magnitude than we estimated amid the critical talent shortage. We are maintaining our INR 2,500 fair value estimate. Even with the market up today, TCS shares are down roughly 2% upon the results. Still, this leaves the shares significantly overvalued, in our view. We continue to believe that TCS represents the creme de la creme of Indian IT services firms, as indicated by our wide moat rating, but we think potential investors should hold off on this name at the moment. We believe the market is not correctly factoring in long-term competition from cloud service providers like Amazon Web Services and various country-specific risks.