India's largest information technology (IT) company - Tata Consultancy Services (TCS) - is expected to post a sequential rise in revenue on the back of the ramp-up of key deals, particularly the BSNL one. The Mumbai-based company will kickstart the second quarter earnings on October 10.
According to a Moneycontrol poll of 10 brokerages, TCS is expected to post a 2.1 percent quarter-on-quarter (QoQ) rise in revenue to Rs 63,938 crore, with profit after tax (PAT) likely growing by 3.2 percent QoQ to Rs 12,420 crore.
Earnings estimates of analysts polled by Moneycontrol are in a narrow range, so any positive or negative surprises may elicit a sharp reaction in the stock.
What factors are driving the earnings?
1. BSNL Deal: Brokerages attribute TCS’s likely revenue growth in the September quarter to the ramp-up of deals in North America, BFSI, retail, and, of course, BSNL.
Jefferies projects a 1.2 percent QoQ constant currency (cc) revenue growth, supported by earlier deal wins and the ongoing BSNL deal ramp-up.
TCS and BSNL are working together on a Rs 15,000 crore deal to establish data centers and 4G sites across India. This deal is expected to revolutionise mobile internet speeds and lay the groundwork for future 5G capabilities.
2. Margin Games: On the margin front, there’s a balancing act to watch. The ramp-up of the BSNL deal is a double-edged sword. IDBI Capital expects EBIT margins to rise by 47 bps QoQ, aided by productivity improvements and pyramid rationalization. BNP Paribas was optimistic, stating, “We like TCS and see it benefiting from the overall demand recovery in the coming quarters.”
On the other hand, Jefferies forecasts a 30 bps QoQ margin decline, attributing it to the cost implications of ramping up the BSNL deal and investments in learning and development.
“Softer growth in developed market and lower margin profile of BSNL will be key margin headwinds, resulting in flat margin,” said JM Financial.
3. Geographical Trends: IDBI Capital forecasts a 2 percent QoQ revenue increase, driven by ramp-ups of deals and demand recovery in North America.
The real challenge, however, lies in the sluggish developed markets. JM Financial and Nuvama Institutional Equities have both warned of headwinds in Europe and the UK. “Focus would be on Europe outlook, which remains challenging despite multiple mega deal wins over the past year,” said Kotak Institutional Equities.
What to look out for in the quarterly show?
The market will watch out for TCS's commentary on demand trends in BFSI and North America. Analysts are also keen to hear about TCS's AI strategy and how it’s leveraging GenAI to win deals and drive future growth. Commentary on customer behaviour post-Fed rate cut, demand trends in Europe and the UK, deal wins, and hiring plans will also be in focus.
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