Tata Consultancy Services is expected to report its third quarter results today, January 8. The country's largest IT services exporter is expected to report strong revenue growth of more than 2.5 percent in constant currency quarter-on-quarter (QoQ) and over 3 percent growth QoQ in dollar revenue led by large deal wins in Q3 FY21. Although margin may get impacted by wage revision.
"We expect constant currency revenue growth of 2.7 percent QoQ and cross-currency tailwind of 50 bps on dollar revenue growth. Growth would be driven by the ramp-up of large deals and higher adoption of digital technologies," said Sharekhan.
The deal wins are likely to remain robust for the quarter following the contract from Deutsche Bank and Prudential.
Kotak Institutional Equities believes that total contract value (TCV) of deals will be robust aided by large deals announced with Deutsche Bank (460 million euro) and Prudential ($300 million). "For comparison, we note that TCV of deals announced in September 2020 and December 2019 quarters stood at $8.6 billion and $6 billion, respectively," said Kotak Institutional Equities.
Profit for Q3 FY21 is expected to be higher than the previous quarter, but the adjusted profit could be flat sequentially.
The September quarter net profit had a post-tax one-time impact of Rs 958 crore due to provision for ongoing litigation with EPIC.
On the operating front, earnings before interest and tax (EBIT) margin may decline by 70-90 bps sequentially following wage hike from October 1, 2020.
"EBIT margin to contract by 78 bps QoQ. Margin decline on a sequential basis would be owing to wage revision (effective from October 1). Net profit is expected to remain flat during the quarter despite a decline in the margin," Sharekhan said.
Kotak, which expects the margin to decline by 90 bps QoQ, said besides wage revision, there are no other meaningful pressure points on margins.
Key things to watch out for would be the outcome of the annual budgeting exercise of clients and its implications for TCS; longer-term impact from changes in - delivery model, contractual structures, the composition of IT spending; commentary on demand environment across verticals especially BFSI and retail verticals; decision making time for large deals; commentary on the growth outlook for FY2022; update on pricing; and margin trajectory.
The stock rose 32.4 percent in 2020 and 15 percent during the quarter ended December 2020. However, it underperformed the Nifty IT index that gained 55 percent and 21.55 percent, respectively.
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