India's largest tech services giant TCS is likely to report moderate growth in its fiscal second quarter earnings, mainly due to weak discretionary spending in the IT sector. Tata Consultancy Services is set to declare its Q2FY24 financial results on October 11.
Analysts expect that the softness observed in the past two quarters will continue, despite the company securing significant deal wins, as profit realisation will require time.
TCS’ profit after tax (PAT) for the July-September quarter is expected to rise 3.12 percent quarter-on-quarter to Rs 11,420 crore, according to an average of five brokerages’ estimates. The firm is likely to report a quarter-on-quarter increase of 1.5 percent in revenue to Rs 60,270crore for the quarter.
BNP Paribas attributes the likely slow revenue growth trend to "the continued impact of a slowdown related to a cut in discretionary tech spending, partially offset by large deal ramp-ups".
Slow IT spending haunts TCS, but new deals may provide some relief
According to Elara Capital, weak discretionary spending in North America and the impact on old managed services deals may dampen momentum. However, there is an expectation of some growth support from Energy, Lifesciences, and Manufacturing (due to the JLR deal worth USD 1 billion), while weakness is expected to continue in Telecom.
“The large deal win rate around vendor consolidation may determine TCS' position in growth leadership, with the key risk being any revenue leakage or project cancellations related to discretionary projects” added the brokerage firm.
The mean of earnings before interest tax (EBIT) margin estimates is at 23.6 percent, a 67 basis points sequential expansion, attributed to operational efficiencies. (Note: One basis point is one-hundredth of a percent). In the April to June quarter, the firm reported EBIT at 23.16 percent.
Significant deal wins for TCS in Q2
The second quarter of the financial year witnessed several significant developments at TCS. The firm secured notable deal wins, including an 800 million pound deal with Jaguar Land Rover (JLR) for five years (from an existing client); and an 840 million pound deal with NEST, the UK's largest workplace pension scheme, for 10 years, announced in June. If the NEST deal is extended, the total value of the contract in its 18-year tenure would reach £1.5 billion.
TCS deal wins outlook in coming quarters
"The deal pipeline should remain resilient, especially in the UK regions, while the US and Europe continue to follow a weaker trajectory. EBIT margin is expected to improve QoQ, following the wage hike impact in Q1. The outlook on the near-term demand environment, BFSI, and deal wins are key factors to monitor," said Motilal Oswal in a note.
Axis Securities expects a moderation of subcontractor costs, likely expanding margins. They also anticipate deal wins in the range of $6-8 billion in the quarter, with management commentary on new deal ramp-up, visibility going forward, and vertical outlook, such as BFSI, Hitech, Manufacturing, and employee additions being crucial areas to watch.
In terms of the demand outlook, while sentiment is turning positive, discretionary spending remains uncertain. Analysts will also watch for the impact of GCC ramp-up, changes in strategy due to organisational restructuring, any buyback announcements, or indications of growth versus margin trade-offs, as TCS' peers have adjusted their margin thresholds to defend margins.
TCS shares have risen during the September quarter, driven by strong deal wins and expectations of demand revival for 2024-25. The stock increased by 6.8 percent during the three-month period (from Rs 3,302 to Rs 3,528), while the Nifty IT index rose 7.5 percent during the quarter.
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