TCS Q1: Analysts expect 5% profit growth at Rs 3787 cr

Tata Consultancy Services (TCS), the country's largest software services exporter, will announce its first quarter earnings on Thursday evening. Analysts on an average expect the profit after tax to grow by 5.3 percent quarter-on-quarter to Rs 3,787 crore.

Revenues are likely to rise by 7.8 percent Q-o-Q to Rs 17,705 crore while dollar revenues may increase by 3.35 percent Q-o-Q to USD 3,142 million during April-June quarter, according to CNBC-TV18 poll.

Earlier, the management had said it would expect growth in Q1FY14 to be better than in Q4FY13 (3.1 percent) with some cross currency swings (30-60 basis points).

Earnings before interest and tax may jump 6.6 percent Q-o-Q to Rs 4,649 crore in first quarter, but EBIT margin is likely to fall marginally to 26.25 percent during June quarter from 26.52 percent in previous quarter.

Analysts feel the impact of wage hike may be offset a rupee depreciation and absence of one offs (of class action settlement charge USD 30 million). Potential impact of promotions on September 2013 margins needs to be watched.

TCS' earnings will be closely watched by the market after Infosys surprised the street, on July 12, with dollar revenue growth of 2.7 percent, volume growth of 4.1 percent and strong deal wins of TCV USD 600 million during the quarter. Infosys maintained its dollar revenue guidance for FY14 at 6-10 percent (including cross currency at 7-11 percent).

According to an analyst meet held in June, TCS is not seeing any significant increase in demand as against earlier expectations, so it maintained status quo in terms of its expectations.

"US market is showing some underlying strength, large deals are providing optimism in Europe while emerging market like India could be weak in Q1FY14 due to higher exit rate in Q4FY13," TCS said in June.

According to that meet, the seasonal increase in wages will adversely impact margins by 200-250 bps versus the previous quarter and the rupee depreciation will help by 75-125 bps depending on how the currency moves for the rest of the month (the rupee touched a record low of 61.21 per dollar on July 90. There was also a one-off adverse impact in the March quarter due to the settlement of a lawsuit in the US which will not recur in the June quarter.

"We see growth in all major verticals including BFSI and retail (except telecom/hi-tech). Immigration bill is is materially negative in its current state. However, they are not seeing any impact on the current deal pipeline due to this," TCS added.

Watch out for

Infosys has turned aggressive on pricing; hence commentary on pricing needs to be watched.

Investors need to watch out for management commentary on mitigation strategies in response to the outplacement clause, if it becomes a part of the final bill.

However, analysts believe TCS is well positioned to drive revenue growth at current pricing levels as TCS' billing rates are already competitive.

Analysts also feel the management will stay positive on demand environment. TCS is the most optimistic about discretionary spending pick-up in FY14.

Foreign institutional investors' ownership in TCS has been increasing to 16 percent in March 2013 from 14 percent in March 2012 and 12.8 percent in September 2011.

The stock closed at Rs 1,673.95, up 1.52 percent on Wednesday, after hitting a record high of Rs 1,684 on the Bombay Stock Exchange.