TCS Q3 preview: BSNL deal completion timeline, client budgets among top 5 themes to watch for

According to Moneycontrol’s poll average of seven brokerages, TCS is likely to see a sequential decline of -1 percent in revenue in Q3. This will be largely driven by a seasonally weak quarter marked by furloughs, cross-currency headwinds and in TCS’ case, BSNL deal revenue contribution starting to slowdown.

TCS had in May 2023 won a Rs 15,000-crore contract from the state-owned Bharat Sanchar Nigam Limited for 4G services.

There could be a revenue decline of $60 million from the BSNL deal in Q3, analysts at JM Financial said in their pre-earnings note. How the BSNL project delivery timeline play out will be closely watched.

Net profit too is set to increase 3 percent sequentially, according to Moneycontrol's poll average.

“Furloughs and cross-currency headwinds will adversely impact Q3 numbers, but on an aggregate basis, the rate of change is positive, supported by improved decision cycles and discretionary spending, despite the absence of mega deals. Tech job postings are recovering, tech layoffs are easing, and bank tech spend has improved over the past few quarters, driving growth in BFSI (banking, financial services and insurance) revenue,” said analysts at HDFC Securities.

Impact of rupee depreciation

The Indian IT sector is currently reaping the benefits and recovering impacted margins quickly as the rupee continues to weaken against the dollar. For TCS, the US accounts for over 50 percent of overall business.

Some experts even said they see the rupee depreciate to 90-92 against the dollar over the next six-nine months. This is largely due to the US economy emerging stronger than expected, which would in turn bring more tech spending from corporates in the region.

In fact, more than Q3, analysts expect this to have a pronounced impact on IT sector margins in Q4 and Q1FY26.

As of Q3, margins are already estimated to expand by 60 basis points (bps) on a quarterly basis, according to Moneycontrol’s poll. Unlike its peers including Infosys, HCLTech and LTIMindtree, TCS concluded its wage hike cycle in the previous quarters.

Demand outlook

For the past several quarters, Indian IT industry players have been signalling green shoots in demand recovery, mostly from specific pockets like BFSI and generative AI. Hopes were high on getting more clarity regarding the demand environment in H2FY25.

Analysts at Motilal Oswal Financial Services said that after a sluggish H1FY25, they now see “clear signs of an acceleration”.

“Recovery appears to be expanding beyond US BFSI—which continues to strengthen—into additional industry verticals such as Hi-Tech, which is recovering ahead of schedule. We expect tier-2 companies to continue to outpace tier-1 firms in growth during the quarter,” the analysts said in the pre-earnings report.

The most important catalyst for the sector is expected to come after Q3FY25, when client budgets for CY25 would be finalised and the magnitude of change in client behaviour would become clearer. This would also determine how the large deal pipeline for companies like TCS would shape up.

In Q3, TCS’ deal wins include a 15-year end-to-end digital solution deal with Ireland’s Department of Social Protection, a multi-year AI-ready, cloud native data landscape deal with Air France-KLM, a transformation deal with Bank of Bhutan, a five-year deal extension with Denmark’s Telenor, and a three-year hardware and software deal for the Indian government’s SPARSH (System for Pension Administration- Raksha) to name a few.

Focus on emerging markets

Tweaking its strategy a bit, in Q2, the TCS management had said that they see an opportunity in scaling in the emerging markets for sustainable growth in the long term. These regions include India, Asia-Pacific (APAC), Latin America, and the Middle East and Africa.

"A scalable presence in these markets is likely to provide the muscle for growth in TCS' overall business over the next couple of decades," the management said in a previous earnings conference call.

In India, TCS has cracked many of the population-scale government deals. It already runs India's passport project, Indian Railways’ IRCTC site, and India Post’s digital project. TCS' contract for running the Passport Seva programme was renewed in a deal worth Rs 8,000 crores.

Generative AI deals

Gen AI has become a significant competitive advantage for tech services companies. And among the top players, only TCS and Accenture have been calling out Gen AI deal pipelines each quarter.

Rival Accenture reported new bookings for Gen AI at $1.2 billion for the first quarter of FY25. Accenture follows an August-September fiscal year. In Q4, the company recorded Gen AI new bookings of $1 billion, and $3 billion for the full FY24.

TCS last announced in October that it is managing over 600 Ai and Gen AI projects, either in production or development stages. The IT behemoth is also setting up interdisciplinary AI offices and a CoE or centre of excellence to strategise, prioritise and implement AI at scale.

Last quarter, TCS did not disclose Gen AI deal sizes or revenue growth details.