TCS Earnings Preview | Widening margins likely to drive revenue up 17%

Tata Consultancy Services: Tata Consultancy Services to be in focus ahead of September FY23 quarter earnings. The company will be in focus ahead of September FY23 quarter earnings.

With expectations of a ‘resilient’ quarterly performance from IT companies, bellwether Tata Consultancy Services (TCS) is all set to kick start Q2FY23 earnings season on October 10.

Consolidated profit after tax (PAT) for TCS may jump 5.4 percent on a yearly basis to Rs 10,151 crore in the second quarter of FY23 (July-September) while consolidated revenue is expected to increase 17.2 percent to Rs 54,949 crore, according to an average of estimates of five brokerages polled by Moneycontrol.

The company had recorded a consolidated net profit of Rs 9,624 crore during the corresponding period of last financial year when its consolidated revenues stood at Rs 46,867 crore. TCS had registered a PAT of Rs 9,478 crore during April to June 2022 period on revenue of Rs 52,758 crore.

Key growth drivers

Analysts believe strong deal execution and robust contracting activity augurs well for the company. “Despite the macro challenges in Europe, contracting activity remains strong for TCS, with the likes of M&S, Boots, Nokia and Zurich Insurance,” HDFC Securities noted.

In rupee terms, revenue is expected to increase 4.1 percent quarter on quarter (QoQ) aided by rupee depreciation. The bluechip company is expected to register 3.5 percent QoQ growth in constant currency terms. “This will be led by continued improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies, and ramp-up of deals,” said ICICI Securities.

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Meanwhile, cross-currency headwinds of 220 basis points QoQ and 540 bps year on year (YoY) will be extremely high and this may impact dollar revenue, which has been estimated at $6,886 million.

When it comes to TCV (total contract value), Kotak Institutional Equities expects moderate growth on a yearly basis. “We see the number to be in the range of $8-8.5 billion,” they said in a note.

Margins

EBIT margin for the company is set to improve by about 50 bps on a sequential basis to 23.6 percent, as analysts believe wage pressure is now behind the company. Global brokerage Jefferies says margin expansion will be highest for TCS in the IT pack, driven by pyramiding, operating leverage and pricing benefit, amidst continued pickup in travel/discretionary expenses and supply-side pressures.

ICICI Securities believes wage hike impact has already been factored in Q1 on continued high attrition pushing higher backfilling expenses as well as higher subcontractor costs.

Both Jefferies and ICICI Securities have worked out EBIT margin of 23.6 percent while Elara pegs it at 23.5 percent.

Things to watch out for

Investors will be closely watching the management’s comments on demand trends in key verticals like BFSI and retail CPG (Consumer Packaged Goods). Margin outlook for FY23, deal pipeline, pricing scenario, attrition rate and client spends in the US and Europe are other key monitorables.

Analysts at Kotak Institutional Equities will also be tracking furloughs in the coming quarter. “The focus on furloughs for the December 2022 quarter will be high. The industry escaped this impact in the last two years due to aggressive client spending and large deal ramp-up,” they said.

On October 10, the Board will also consider declaration of second interim dividend to equity shareholders. That’s another thing investors will have an eye on.

Bearing the brunt of FII selling in the first half of the year, TCS has declined 20 percent in 2022 so far. It hit a 52-week low of Rs 2926 on September 26th. Ahead of earnings, the stock is trading in the red.

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