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TCS: Q3 Results Preview – PAT may increase 14.5 percent from last year, revenue may grow 16 percent

Total contract values are expected to be little changed on a sequential basis. Supply-side challenges remain, but the demand outlook remains strong

January 12, 2022 / 09:36 AM IST
 
 
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Tata Consultancy Services, India’s largest IT service provider, and rivals Infosys and Wipro will kick off the third-quarter earnings season by declaring their results on January 12.

Although the December quarter is seasonally weak for the IT sector due to the year end holidays, experts said most companies may report steady sequential revenue growth on the back of secular, broad-based demand trends, healthy deal wins and active mergers and acquisitions.

Overall demand remains strong, driven by strong client requirements for digital, cloud, data analytics, 5G, Internet of Things, cyber security and artificial intelligence projects.

Consolidated profit after tax for TCS may jump by 14.5 percent on a yearly basis to Rs 9,965 crore in the third quarter of FY22 (October-December), while consolidated revenue is expected to increase by 15.6 percent to Rs 48,545 crore, experts said.

The company reported profit of Rs 8,701 crore and revenue of Rs 42,015 crore in the corresponding quarter of the previous financial year. Consolidated profit was Rs 9,624 crore and revenue stood at Rs 46,867 crore in the previous quarter (July-September) of FY22.

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Views from the street

Top line

Brokerage firm Motilal Oswal forecasts a 2.4 percent sequential jump in dollar revenue to $6,482 million, while in rupee terms, revenue is expected to grow by 4.6 percent to Rs 49,000 crore. This works out to a year-on-year growth of 16.6 percent.

Kotak Institutional Equities expects a 14.7 percent on-year growth in revenue to Rs 48,200 crore.

“December is a seasonally weak quarter. impacted by furloughs. We expect modest sequential revenue growth of 2.8 percent,” Kotak said in its report. Growth will be broad-based and moderation in YoY growth is expected as the benefits of a low base fade, it said.

“We build in 1.9 percent QoQ USD revenue growth, factoring in ~80 bps cross-currency headwinds,” Emkay Research said in its report. It expects revenue at Rs 42,015 crore, a growth of 15.2 percent YoY and 3.3 percent sequentially.

One basis point (bps) is one-hundredth of a percent.

Deal wins

Deal wins may be stable compared with those in the previous quarter, with experts expecting a total contract value (TCV) of $7.5 billion. Most deals will likely be mid-sized and small contracts.

“We expect $7.5 billion of TCV, powered by mid-sized deals. We do not expect any skew in TCV from mega-deals,” Kotak said. It added that the TCV will grow 10 percent YoY and could be little changed sequentially.

Margin expectations

Experts said margins may contract on a yearly basis, but they have mixed expectations on their sequential growth.

Motilal Oswal expects the EBITDA (earnings before interest, taxes, depreciation and amortisation) margin at 28.2 percent in the third quarter from 29.1 percent last year. On a sequential basis, it expects the EBITDA margin to expand by 20 basis points from 28 percent in the previous quarter.

“Expect sequential expansion in margin, led by SG&A (selling, general & administrative expense) leverage,” the brokerage added.

Kotak Institutional Equities expects a 125 bps YoY reduction in the EBITDA margin to 27.8 percent. On a sequential basis, it expects a margin contraction of 18 bps.

“We forecast sequential and YoY decline in EBIT margin courtesy of investments, increase in discretionary costs and high cost to backfill attrition,” it said.

Emkay Research expects the EBITDA margin to contract 98 bps on a yearly basis to 28.1 percent. However, sequentially, the margin is expected to improve by 9 bps.

“EBIT margin is likely to expand 20 bps QoQ due to flattening employee pyramid, higher offshoring, and revenue growth-led operating leverage,” Emkay said.

Bottom line performance

Profit for TCS in the quarter is forecast to grow in a range of 11 percent to 17 percent on a YoY basis.

According to Motilal Oswal, profit may climb 17.1 percent on a yearly basis to Rs 10,200 crore, which is up 6 percent on a sequential basis.

Emkay expects a 14.4 percent YoY and 3.4 percent QoQ growth and forecasts earnings of Rs 9,951 crore.

Kotak is more conservative and expects YoY growth of 10.8 percent in profit to Rs 9,645 crore. On a sequential basis, this works out to 0.2 percent growth.

In focus

Experts will look for the views of TCS on a range of factors, including the durability of growth and the magnitude of opportunity from the aggressive shift to the cloud by clients and the medium- to long-term growth outlook.

They will also want to know about the company’s expectations on demand trends in key verticals such as banking, financial services and insurance (BFSI), retail, manufacturing and communications; reasons for lack of large deal momentum; pricing environment; margin outlook; supply-side challenges and attrition, and indications on IT spending for CY2022.

The TCS stock gained 0.9 percent to Rs 3,915.90 at the close on the National Stock Exchange on January 11. It generated returns of 23.3 percent in the past year and 4.8 percent during this financial year. The stock gained 7.7 percent in the past one month.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before making any investment decisions.
Gaurav Sharma
first published: Jan 12, 2022 09:36 am
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