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Last Updated : Jul 09, 2020 07:45 AM IST | Source: Moneycontrol.com

TCS Q1 Preview: Look out for trends in verticals, pricing pressure, deal pipeline

Brokerages expect 30-50 bps sequential decline in EBIT margin due to lower utilisation, weak operating leverage offset by rupee depreciation and lower travel expenses.

 
 
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The country's largest IT services provider Tata Consultancy Services (TCS) will kick off the June quarter earnings season on July 9. Brokerages largely expect a 5.5 percent sequential decline in the company's constant currency revenue for the quarter.

The cross-currency headwinds could be 40-50 bps, hence the dollar revenue may fall 5.9-6 percent QoQ due to worldwide lockdown that hit travel, transportation, retail, auto, energy and manufacturing segments, though financial and life sciences sectors will be stable.

"Sharp pullback in spending among directly impacted verticals of travel, transportation, retail (apparel and department stores) and autos will lead to a revenue decline. We expect relatively stable performance in the financial services vertical. Ramp up of large deals will limit the impact on overall revenues," said Kotak Institutional Equities. It sees 5.4 percent QoQ fall in the constant currency revenue and 6 percent in the dollar revenue.

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Overall, profit is expected to decline in the range of 2-4 percent on the back of lower revenue and weak operating performance.

Brokerages expect 30-50 bps sequential decline in EBIT margin due to lower utilisation, weak operating leverage offset by rupee depreciation and lower travel expenses.

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"EBIT margin is expected to decline by 43 bps QoQ and an improvement of 51 bps YoY. Margin headwinds during the quarter will be lower utilisation, pricing pressure, and pressure in legacy business, which will be partially mitigated by currency tailwind, lower travel expenses, and cut in variable compensation payouts," said Sharekhan, which sees net profit falling by 2.9 percent sequentially during the quarter.


Deal wins are expected to be sharply lower because of the supply-side pressure in the first half of the quarter due to lockdowns imposed by several countries, followed by easing in the second half of the June quarter. TCS had reported a total contract value (TCV) of $8.9 billion in Q4FY20.


Commentary on large deal wins and deal pipeline, trends across verticals, pricing pressure and margin trajectory, long-term trends in IT services spending, changes in delivery model will be key things to watch out for.
"Commentary on back-ended recovery in revenue growth remains key. TCV wins and commentary on market share gains owing to vendor consolidation would be keenly watched," Centrum said.

 
First Published on Jul 9, 2020 07:45 am
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