TCS Q1FY24 Earnings| Five things to watch out for

Tata Consultancy Services is set to announce its Q1FY24 earnings on July 12.

Tata Consultancy Services (TCS) is set to kickstart the IT sector earnings season on July 12. This will be the first quarter its new CEO K Krithivasan directly addressing the earnings conference. All eyes will be on Krithivasan’s commentary on his vision for the company and any likely strategy changes.

Analysts expect the first quarter ended June 30, 2023 will be subdued for all IT companies, with slowing demand and several macroeconomic challenges leading to client companies rethinking tech budgets. Cost take out deals and vendor consolidation deals will still continue to drive demand.

EBIT margins or operating margins for most companies are expected to remain flat while, TCS will see a decline due to its recent wage hikes.

Here are the five themes to watch out for in TCS Q1 earnings performance:

Revenue Growth

According to analyst estimates, TCS will report flat to 0.2 percent revenue growth QoQ in constant currency terms, hit by weak discretionary spending, projects being put on hold and other macroeconomic challenges in geographies like North America and Continental Europe.

The company also missed its EBIT margin guidance of 25 percent in Q4 touching 24.5 percent, this might slip further by 80-90 bps in Q1FY24, driven by wage hikes announced in April. Whether the company will now update its margin guidance or stick to the previous benchmark and the available levers that would propel the company’s margins in the future.

Demand Outlook

During its recent AGM, Chairman N Chandrasekaran already cautioned shareholders of the uncertainties in the global economic situation, higher inflation etc. He said that client companies will calibrate their spending in the near-term, depending on the sizes of their allocated tech budgets.

While he is bullish in the mid- to long-term, there is a slowdown expected in discretionary spending in the near term. Commentary on sectors like BFSI, retail and telecom which have already showed decline in revenue growth in the past four quarters, will be watched out for.

Having said that, TCS bagged several billion dollar plus and long-term deals in the United Kingdom this quarter. This include a $1.1 billion deal from UK’s NEST, a $1 billion plus deal with Marks & Spencer, a 10-year contract with UK’s Teacher’s Pension Scheme and another deal with the Phoenix Group to name a few. Closer home, a consortium led by TCS won a deal from government owned telco BSNL with an advance purchase order of $1.8 billion.

Amidst all of these deals, TCS also lost a $2 billion deal and a 10-year contract from US-based Transamerica Life Insurance, which it got in 2018.

“Demand uncertainty seen in month of March has continued in Jun’23 quarter. TCS is seeing some project cancellations and postponements. Some right-shifted projects have started ramping up in June. Europe and UK are growing well while there is more weakness in North America,” analysts at ICICI Securities.

TCS so far maintained its quarterly total contract value of deals in its guidance of $7-9 billion.

Push for AI offerings

TCS is largely focusing on its newer technology offerings like artificial intelligence for next phase of growth.

Krithivasan in the company’s annual report said, “As part of their continuing digital transformation journey, we see sustained focus on cloud adoption, data architecture, customer experience and business model transformation.”

“On top of these current focus areas, technologies like 5G, IoT, generative AI, virtual reality / metaverse, digital twin and others are also gaining attention and are likely to attract investments in the short to medium term,” he added.

TCS recently partnered with Google Cloud and Microsoft’s Azure Open AI to develop industry-specific use cases. TCS even launched its own generative AI offering, and plans to train 25,000 employees in AI technology apart from the 50,000 existing associates.

Sectorial pressures

Sectors like banking, financial services and insurance (BFSI), tech and communications, retail and manufacturing have shown a steady decline in quarterly revenue growth over the past four quarters.

BFSI, which contributes around 35-40 percent of TCS’ revenue, was also hit by the global banking crisis earlier this year when Silicon Valley Bank, Signature Bank and the First Republic Bank in the US. Though there were no direct impact on TCS’ business, clients in the BFSI sector are slowing down tech spending.

As clients increasingly cut down on discretionary spending, telecom, tech and communications are taking a hit.

Hiring trends

TCS added 22,600 employees in FY23, a significant decrease from the 1.03 lakh net employee addition in FY22. Indian IT companies have been stating that the co-relation between revenue growth and hiring have started to become non-linear, as these companies increase focus on improving utilisation of the existing talent.

During TCS’ earnings conference last quarter, CHRO Milind Lakkad had shared that the company has already rolled out offers to 46,000 freshers for the FY24. In the past couple of quarters, TCS had steadily decreased its attrition rates. Lakkad expects TCS will reach its pre-pandemic attrition rate of 12-13 percent by the second half of FY24.

Unlike delays and variable pay cuts seen with certain peers, TCS has been consistent in paying out timely variable pay, at least for the junior staff. Last quarter, the company paid out 100 percent of the variable pay and said that the upcoming hikes for high performers will be at 12-15 percent, as is standard. Other hike bands are 8 percent, 5 percent and 1.5 percent.

While last fiscal year was the time for bettering utilisation rates, this year could be about ramping up and training talent to meet demand for AI projects. As the first quarter of the fiscal year, hiring targets will be of utmost focus.

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