TCS Q4 Preview| Subdued growth expected due to client delays in US and Europe

Tata Consultancy Services (TCS), India’s biggest Information Technology (IT) services company, will likely report subdued fourth-quarter earnings as US and European clients shaken by a banking crisis delayed on tech spending decisions.

TCS will announce on April 12 its earnings for the three months ended March, a quarter marked by the collapse of California-based Silicon Valley Bank (SVB) and the takeover of Credit Suisse by UBS.

Indian IT services companies are heavily dependent on the Banking, Financial Services and Insurance (BFSI) industry, which means that spending cuts and extended decision-making cycles at clients in this sector are likely to impact their revenue.

Also Read: All eyes on CEO successor in waiting, BFSI contagion as TCS kicks off earnings season

Kotak Institutional Equities notes that TCS has a 29 percent exposure to the banking and financial services.

The Tata Group company is expected to report 2.1 percent Quarter-on-Quarter (QoQ) revenue growth in rupee terms in the fourth quarter; net profit is expected to increase 6.2 percent QoQ.

Consolidated revenue is expected to come in at Rs 59,463 crore with a Year-on-Year increase of 17.5 percent, a poll of securities firms shows. Consolidated net profit is expected to increase 16 percent YoY to Rs 11,515 crore.

In Constant Currency (cc) terms, securities firms expect growth to range from 0.1 percent to 1.1 percent QoQ.

“We expect muted revenue growth for TCS over the next two quarters at 0.1% and 0.5% QoQ in CC terms due to delay in decision-making in its two most important geographies, North America and Continental Europe, which together account for roughly 70% of its overall revenues,” ICICI Securities analysts wrote.

Deal wins 

The firm projects TCS to report 6.2 percent cc YoY growth in FY23 and expects demand to revive starting in September 2023 as postponed projects get executed along with cost optimization deals.

Analysts are divided on the deal flow for the quarter. JM Financial expects the Total Contract Value (TCV) to be lower sequentially because of the banking crisis resulting in lower deal closures. Asian Market Securities (AMSEC) projects strong deal wins of over $10 billion for the quarter.

“Deal flow is expected to remain strong with TCS likely to post USD 8.5bn TCV (supported by Phoenix, Telefonica, Bombardier deals),” wrote HDFC securities.

Management expects to deliver 25 percent Earnings Before Interest and Tax (EBIT) margin, i.e. +25 Basis Points (BPs) in the corresponding period of the previous financial year. One basis point is one-hundredth of a percentage point.

Also Read: IT may log in muted revenue in Q4, analysts see bleak near-term outlook for BFSI

Margins 

The analysts’ poll says EBIT is expected to grow 4.2 percent QoQ and 17.9 percent YoY to Rs 14,886 crore. EBIT Margin is expected to expand 50 BPs QoQ and stay flat on a yearly basis at 25 percent.

“We expect margins to improve by ~50 bps qoq led by improved utilization rates, lower subcontracting expenses, and easing of supply side pressure,” AMSEC analysts wrote.

Investors will closely follow management commentary on demand, updates on the banking and financial services vertical, clients’ tech budgets, details of the deal pipeline and wins, trends in the attrition rate and the outlook for margins.

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