Tata Consultancy Services (TCS), India’s largest software exporter, is set to kickstart the IT industry's earnings season for the second quarter on October 10. The industry is expected to report a steady gradually improving quarter even as macro uncertainties continue to loom.
For TCS, the focus will remain on its demand recovery and generative AI (Gen AI) pipeline as rival Accenture had recently posted a stellar uptick in interest and revenue from Gen AI projects.
Here are the top five themes to watch out for:
Revenue growth and margins
According to Moneycontrol’s poll of 10 brokerages, TCS’ revenue is expected to grow 2.1 percent sequentially and 7.1 percent year on year (YoY) to Rs 63,938 crore. Profit after tax (PAT) is expected to increase 3.2 percent sequentially and 9.5 percent YoY.
Meanwhile, EBIT margin is expected to remain flat at 24.7 percent sequentially. ICICI Securities, however, is projecting a possible expansion in margins by about 50 basis points in the absence of Q1’s wage hikes and subcontracting levers also being used to the maximum.
On the contrary, Motilal Oswal’s report suggests a slight decline in margins, “largely due to the BSNL deal ramp-up and investments made in talent development and training.”
Some part of the revenue growth in Q2 is expected to come from the ongoing execution of the BSNL deal. Analysts at JM Financial have estimated an incremental revenue contribution of about $75 million coming from the BSNL deal, which will, in turn, drive another quarter of growth for the regional markets segment that includes India too.
Deal wins
In Q1, the company’s management had projected broad-based traction across verticals for deals.
As of Q2, analysts expect the company to sequentially report several large deals and a higher order book. Deal wins this quarter were dominated by the retail sector majorly including deal wins from Primark, McDonald’s and Croma.
Interestingly, most of these were digital and business transformation related deals, unlike the expected trend of efficiency/cost takeout and vendor consolidation deals, giving hopes of transformation deals returning and customers opening tech spends.
“TCS saw a higher number of large deal announcements in Q2 (>2x of Q1FY25). We saw increased traction in retail vertical for TCS (coming from deals like Primark, McDonald's and Croma), continuing the sequential growth in the vertical from last two quarters,” according to a report by ICICI Securities.
In recent quarters, TCS has been reporting strong growth in the India market driven by the revenue coming in from the Rs 15,000-crore BSNL deal.
Demand outlook
There have been several updates in the last quarter in terms of green shoots in the macroeconomic situation, perhaps the biggest of all was the US Federal Reserve cutting interest rates by 50 basis points, the first time in nearly four years.
This is likely to have a direct impact on several industries starting with the banking, financial services and insurance (BFSI) sector, which accounts for nearly 35-40 percent of TCS’ revenue in any given quarter.
As the rate cut is a very recent development from last month it is yet to have an immediate impact on customers’ technology budgets.
As Accenture CEO Julie Sweet said at the company’s Q4FY24 earnings conference last month, the environment is really more of the same and it has been kind of cautious. “Right now they (clients) are going in the budget season. We'll really see in January and February but there hasn't been much of a change. The macro is kind of the same,” she said.
TCS’ management too will be observed for their commentary on the demand expected in the second half of FY25. Further, demand and recovery in the BFSI sector and North America will be seen.
Generative AI pipeline
TCS is one of the two IT giants which has been reporting its Gen AI pipeline numbers; the other one being Accenture.
Despite the current market headwinds, Gen AI has continued to remain the only silver lining where customers have been reallocating tech budgets to do early experimentations and proof of concepts (PoCs).
Accenture ended FY24 with Gen AI order inflows of $3 billion and $900 million in revenue. This is a significant jump from $300 million in order inflows and $100 million in Gen AI revenues seen in FY23.
Its new-gen AI bookings for Q4 came in at $1 billion.
In terms of Gen AI deal sizes too, there have been larger deals in the size of around $10 million as compared to only $1 million PoCs seen earlier.
For TCS, the last reported figures for AI and Gen AI pipeline in Q1 stood at $1.5 billion and the company was then executing over 270 AI projects.
Hiring plans
Unlike TCS’ peers including Infosys, HCLTech, LTIMindtree, and LTTS which have delayed their wage hike cycles to the third quarter to manage costs and sustain profitability, TCS concluded its wage hike cycle in Q1 itself.
TCS, as shared during Q1 earnings, plans to add 40,000 freshers in FY25, along with opening lateral hiring after a year of lull. The company had also mandated return to office for five days a week.
Any updates on hiring plans, Gen AI training, and other employee metrics will be closely watched.
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