TCS Q3 Earnings Preview: 5 things to watch out for

Earnings with MC

The country’s largest IT services company, Tata Consultancy Services (TCS), is set to announce its earnings on January 11, for the third quarter ended December 31 of the financial year 2024.

This quarter was largely a slow quarter for not just TCS but the IT sector overall amidst the holiday season in key markets like the North America and Europe, coupled with uncertainty in discretionary spending and restrained technology budgets of clients, also resulting in higher furloughs.

As the sector gears up for the next calendar year after seeing one of the weakest years in terms of growth in 2023, it will also have to brace for the upcoming elections in the US and India and what it holds for the clients’ industries.

Analysts expect muted quarterly earnings, with three out of the top 5 tier-I IT companies estimated to report a decline in QoQ and YoY revenue growth, though TCS would likely remain steady. TCS is expected to see a flattish EBIT margin uptick by 20 basis points in Q3, according to Moneycontrol’s poll estimates.

Here are the five themes to watch out for in TCS’ Q3 performance:

Revenue growth

According to Moneycontrol’s estimates, TCS’s revenue for the quarter is expected to grow 2.46 percent YoY and on a sequential basis, it is expected to decline by 0.05 percent, coming in at Rs 59.662 crores.

Net profit is estimated to reach Rs 11,504 crores, growing by around 6.06 percent YoY and 1.43 percent QoQ.

“We expect muted overall revenue growth due to furloughs in hi-tech and financial services…We expect moderate deal wins of $8.5-9 billion. Quantum of deals announced has been muted especially in the North American market. The focus will be on the outcome of the client budgeting cycle for CY2024,” said analysts at Kotak Institutional Equities.

Commentary on expectations of spending revival, especially discretionary spending, improving margins and client budgeting will be closely observed.

Demand outlook

The second quarter was historically the strongest in terms of deal total contract value (TCV) for the top five IT companies. TCS reported a TCV of $11.2 billion in Q2 – its second largest in a quarter – and the third consecutive quarter of over $10 billion in TCV.

This was driven by some mega deals of $700 million plus in value and several multi-year deal renewals. In turn, TCS had increased its quarterly deal win guidance to $9-10 billion, up from $7-9 billion.

In Q3, however, mega deal wins have been slower to come by leaving analysts expecting TCV to be in the lower end of the guided range.

Geographically, North America, a key market for TCS remained a weak spot in terms of deal wins. According to data from Kotak, only three out of the 29 key deals announced for the IT sector, were from North America while the majority came from the Europe region.

Also read: IT Q3 FY24 earnings: Five factors to watch out for

Furloughs and hiring slowdown

A few of the major colleges Moneycontrol had reached out to had shared that TCS, among a few other major IT companies, is yet to go for campus hiring to their college this year. According to them, TCS usually goes for campus hiring in September and October, but this year the colleges remain uncertain if TCS would come even in January.

Last quarter, TCS said that it plans to hire 40,000 freshers in FY24.

Apart from a slowdown in fresher intake, TCS is also onboarding lateral hires in a phased manner. All of this could culminate in further decline or at least slowing of headcount addition as furloughs will also be high in Q3.

Poaching crisis and retirement year

A talking point lately in the Indian IT industry is that company veterans are moving out to join other leadership positions in rival companies. Last week, Wipro was in the news for suing two of its former senior executives including ex-chief financial officer Jatin Dalal for joining Cognizant by breaching non-compete clause in his employment contract.

Infosys too had to send out written communication to deter Cognizant from poaching talent from the firm.

Though TCS was one of the fortunate ones among the top IT companies that didn’t see as many such instances, any industry-focussed comments on the same will be observed.

Moreover, TCS would instead have some senior leadership members retiring in 2024. According to media reports, TCS veteran and chief operating officer (COO) as TCS veteran N Ganapathy Subramaniam is set to retire in May 2024, while Ritu Anand, chief leadership and diversity officer is likely to retire in March.

Generative AI commentary

Cloud adoption and artificial intelligence are the two major themes that TCS’ management is currently building its future demand thesis on. This was evident from the restructuring unveiled in 2023. The company had set up a new unit called TCS AI Cloud, combining all its public cloud units and Al initiatives.

During the Q2 earnings conference in October, TCS said that it has more than 250 generative AI opportunities in the pipeline and completed training over 100,000 employees.

As of now, rival Accenture seems to be ahead of the curve in terms of generative AI projects, though the company’s overall demand outlook too remained bleak. Accenture reported that its generative AI pipeline rose to $450 million worth of new bookings in its first quarter ended December 30, compared to $300 million in the full year of FY23. The company expects clients to move from Gen AI experimentation to more proof of concepts and pilots in 2024.

TCS’ plans and updates on generative AI adoption will be closely watched.