Software services provider Tata Consultancy Services' (TCS) third quarter earnings are expected to be week on account of seasonality (due to year-end furloughs) and cross currency headwinds. Profit is seen falling 1.5 percent sequentially to Rs 6,489 crore and revenue may grow 1 percent to Rs 29,577 crore in Q3.
According to average of estimates of analysts polled by CNBC-TV18, revenue in dollar terms may increase only 0.2 percent to USD 4,382 million and constant-currency revenue growth may be around 1-1.5 percent compared with previous quarter.
Analysts say cross-currency movement is likely to cause revenue growth headwind. During the quarter, US dollar appreciated 5.3 percent against pound, 3.2 percent against euro and 1 percent against Australian dollar.
After September quarter earnings, the management had guided for Q3 and Q4 to be better than usual due to Rs 180 crore India deal (which pushed forward from Q2 to Q3) and likely recovery in retail segment (that recorded 3.1 percent degrowth in constant currency revenue in Q2FY17).
Analysts will closely watch revenue from its digital business that contributed 16.1 percent to total revenue in Q2FY17 against 15.9 percent in Q1FY17. Digital growth slowed down to 1.5 percent QoQ in Q2 due to retail weakness. According to them, insurance/Japan businesses are expected to be under pressure.
Earnings before interest and tax during the quarter is seen rising moderately to Rs 7,694 crore from Rs 7,617 crore but margin may remain flat at 26 percent (the low end of guidance of 26-28 percent for FY17) on sequential basis.
In Q2FY17, margin had a one-time law suit settlement of USD 26 million which depressed margin by 50-60 basis points. Absence of this one-time cost may aid margin in Q3.
Analysts say TCS may reiterate its EBIT margin guidance of 26-28 percent for beyond FY17.
Key to assess at TCS would be whether acceleration in FY18F is likely and can it sustain its 26-28% EBIT margins going into next year in light of pricing pressures and need to prepare for tighter US immigration controls or possible H1-B salary increases
Currently the biggest fear in the market is Donald Trump policies on immigration, which would be closely watched by analysts. Last week, Protect and Grow American Jobs was introduced in the US Congress by two Republicans, which proposed an increase in the minimum H1B wage to USD 100,000 from USD 60,000 that is huge cost hit to IT companies and unlikely to be passed on to clients due to competitiveness.
Management comments relating to USD revenue growth/margin outlook for FY17 and client IT budgets for CY17 will be closely watched.
TCS stock (down 2 percent) outperformed Infosys (down 7.5 percent) in the last 3 months.