IT services major Tata Consultancy Services will kick off the earnings season for tech companies with its Q4 FY24 financial results on April 12. The IT sector is expected to report muted growth in the fiscal fourth quarter because of weak discretionary spends in the West.
But TCS is likely to lead the earnings growth among large-tier IT firms riding on large deals, with margins seen improving due to cost optimisations, and deal wins continuing into the new fiscal year.
The Q4 revenue in rupee terms for TCS is expected to rise 1.5 percent quarter-on-quarter to Rs 61,414 crore, according to an average of 10 brokerage estimates. Its fourth-quarter net profit may rise 5.8 percent quarter-on-quarter, shows the poll. The company's EBIT margin for the quarter is seen improving to 25.3 percent during the January-March period.
TCS stock has risen 4.5 percent so far this year (since January), matching Nifty 50 returns over the same period. But it has far outpaced the Nifty IT index, which fell 0.6 percent year-to-date.
TCS to lead revenue growth; deals to help
The Tata group company’s Q4 revenue growth would be aided by sustained winning of deal, ramp-up of large deals, including BSNL, and recovery in manufacturing and BFSI verticals.
Also Read: Mid-tier IT revenue growth may beat large firms, low US spends continue to hurt
Nuvama expects TCS revenue growth for the quarter to be “driven by a recovery in BFSI and continued strength in manufacturing”, its analysts said in a recent note.
On the other hand, recent deal wins, and ramp-up of the large BSNL deal would also contribute to revenue growth, said Dolat Capital and Phillip Capital in their respective pre-earnings research notes.
Earlier, in May 2023, a consortium led by TCS had won a mega deal worth Rs 15,000 crore from state-run telecom firm BSNL to deploy 4G network across the country. Reports said at the time that TCS was expected to pocket about 80 percent of the total order value.
“We expect +1.6 percent QoQ CC (constant currency) revenue growth (for TCS in Q4) helped by full quarter ramp up of BSNL deal, reversal of furloughs and ramp up of other large deals,” said Phillip Capital.
Cost optimisation, new deals to help Q4 margins
Most brokerage analysts also see TCS operating margin improving in Q4 FY24, helped by lower sub-contracting costs, and robust deal wins continuing in the coming quarters.
“Moderation of sub-con costs are likely to expand the margins by 72 basis points,” said Axis Securities. Further, the margins may also expand on account of easing supply-side constraints and lower onsite expenses, the brokerage firm added.
Not only this, better utilisation would also offset the impact of lower margins on the mega BSNL deal, said JM Financial.
Deal win momentum to last; business verticals to watch out for
Brokerages are upbeat on TCS continuing to win new deals. “We expect deal wins to be in the range of $7-9 billion in the quarter (January-March),” said Axis Securities.
Nuvama too said the brokerage expects TCS’ strong deal-wins streak to continue. HDFC Institutional Equities predicts strong deal bookings at above $10 billion, with several large deals in Europe.
It’s the management commentary FY25 demand environment, especially discretionary spending, that brokerages are watchful about for hints of the future growth prospects.
Vertical commentary features among the most common watcheables from TCS results. “The management commentary on new deal ramp-up, visibility going ahead, and vertical outlook on BFSI, hi-tech, and manufacturing are key things to watch out for,” said Axis Securities.
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