All eyes will be on IT bellwether Tata Consultancy Services’ (TCS) Q3 results today. In a seasonally-weak quarter, the Tata-group company is expected to report 2.9 percent quarter-on-quarter (QoQ) growth in revenue, while net profit is expected to increase 7.8 percent QoQ in the October-December quarter.
According to a poll of brokerages, consolidated revenue might come in at Rs 56,992 crore, registering 16.4 percent year-on-year (YoY) growth, while consolidated profit after tax (PAT) is expected to increase 15.1 percent YoY to Rs 11,247 crore.
In constant currency terms, analysts are forecasting a revenue growth of 1.9 percent on a quarterly basis. This is significantly lower than the 4 percent growth registered in Q2 largely because Q3 is generally considered a weak quarter for IT companies.
In the October-December quarter, billable (working) days are fewer during the holiday season and furloughs are higher.
“Over the past two years, aggressive client spending in technology and large deal ramp-ups helped in overcoming the seasonal weakness of Q3,” noted foreign brokerage firm Nomura. This time, industry seasonality is set to return with pain further accentuated by macro concerns of slowdown in the US and Europe.
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Investec Securities in its report notes that the management of TCS had earlier indicated headwinds in property and casualty (P&C) insurance, mortgage, discretionary retailers in Europe and the UK, and potentially higher furloughs.
Margins, however, are set to expand on a sequential basis by 80 basis points. One basis point is one-hundredth of a percentage point. The increase in earnings before interest and taxes (EBIT) margin will be led by depreciation of the rupee against the USD and general operational improvements, noted analysts.
“Supply-side pressures are also abating with compensation expectations moderating and attrition coming off. This, too, will help in margin improvement on QoQ basis,” said Nirmal Bang Institutional Equities. EBIT margin is expected at 24.80 percent.
Deal wins and things to watch out for
Management commentary on deal wins will be keenly monitored to get a sense of any slowdown in client spends. Analysts at Kotak Institutional Equities expect total contract value (TCV) of $9 bn+ for the quarter, stating that the company has been active in a number of deal announcements. BT Group and UK Government’s rail data marketplace were some of the significant deal-wins of the past quarter.
Other important factors to watch out for will be: commentary on rate of spending increase / decline and priorities of clients; impacted geographies and verticals especially hi-tech and retail; and attrition rate and vendor consolidation opportunities.
The management has maintained that 26-28 percent margin band in the longer term is TCS' guiding beacon. Thus, the Street will be eyeing commentary on growth levers to achieve that band.
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