India’s largest tech services giant by market cap Tata Consultancy Services (TCS) is set to report its earnings for the second quarter of the financial year on October 11. The IT firm is likely to report a muted July to September quarter, in continuation to the softness seen in the past two quarters, despite having made big deal wins as profit realisation will take time.
Analysts suggest that the focus will be on gauging whether the worst is behind the IT industry and if demand is picking up.
TCS shares have run up in the September quarter on the back of strong deal wins and expectations of demand revival for 2024-25. The stock went up 6.8% during the three-month period (from ₹ 3,302 to ₹ 3,528) while the Nifty IT index rose 7.5% during the quarter.
Analysts expect the stock to trade at 23X PE in the next financial year. In 2023 (year-to-date), TCS has witnessed a 10% rise and Nifty IT is up 12%.
Analysts polled by CNBC-TV18 expect TCS’ revenue, in dollar terms, to rise 0.75% to $7280 million as compared to $7226 million in the previous quarter. In rupee terms, they believe a rise of 1.3% on a quarter-on-quarter basis to ₹ 60,160 crore as against ₹ 59,381 crore is likely.
CC revenue growth is seen at 0.8% vs 0% QOQ
CC | Q2FY22 | Q3FY22 | Q4FY22 | Q1FY23 | Q2FY23 | Q3FY23 | Q4FY23 | Q1FY24 |
QoQ | 4% | 4% | 3.20% | 3.5% | 4% | 2.20% | 0.60% | 0 |
YOY | 15.50% | 15.40% | 14.30% | 15.5% | 15.40% | 13.50% | 10.70% | 7% |
The tech behemoth is likely to report operating profit or earnings before interest and taxes (EBIT) at 23.6% or ₹ 14,195 crore, analysts have projected. In the April to June quarter, the firm saw EBIT at 23.16%, that is, ₹ 13,755 crore.
| Q3FY22 | Q4FY22 | Q1FY23 | Q2FY23 | Q3FY23 | Q4FY23 | Q1FY24 |
EBIT % | 25% | 25.0% | 23.1% | 24% | 24.53% | 24.49% | 23.20% |
TCS profit after tax (PAT) for the September quarter is likely to rise marginally i.e. 0.8% to ₹ 11,162 crore compared to ₹ 11,074 crore in the last quarter.
The second quarter of the financial year witnessed several big developments at TCS. The firm saw good deal wins, including a large 800 million pound deal with Jaguar Land Rover(JLR ) for five years (existing client) and an 840 million pound deal with NEST, UK's largest workplace pension scheme, for 10 years announced in June end. If the NEST deal is extended, the total value of the contract in its 18-year tenure would be £1.5 billion.
According to brokerage firm Kotak, TCS’ total contract value is seen at $12 billion for the September quarter. This is against $10.2 billion in the last quarter, while the firm had forecast it to come in at $7-9 billion.
Also Read | Will strong deal wins result in better guidance from TCS, Infosys and peers?: IT Earnings Preview
TCS also announced a new operating structure, the one under the new CEO K Krithivasan.
Analyst suggests that the deal wins should bode well for TCS’ recovery in FY25. The CNBC-TV18 poll of analysts pegs FY25 constant currency (CC) revenue growth at 9- 9.5% versus 5-5.5% in the 2023-24 fiscal.
The poll projection suggests that in the second quarter, TCS’ margin would improve by 45 basis points (bps) after a 120 bps decline in the June quarter due to wage hikes. However, it must be noted that margin recovery is unlikely to be as strong as what is typically seen in the September quarter. In the corresponding quarter last year, the firm’s margin had improved by 90 bps.
TCS management’s commentary on demand and the recovery expectation in the second half of the financial year, banking verticals, telecom and North America, which was weak in Q1, large deal wins, and employee addition will be key to track.
North America, Continental Europe slowed down further, while UK was strong
Geo YOY - CC | Q1FY23 | Q2FY23 | Q3FY23 | Q4FY23 | Q1FY24 |
NA | 19.10% | 17.60% | 15.40% | 9.60% | 4.6% |
Latin Am | 21.60% | 19% | 14.60% | 15.10% | 13.5% |
UK | 12.60% | 14.80% | 15.40% | 17% | 16.1% |
Contin Europe | 12.10% | 14.10% | 9.70% | 8.40% | 3.4% |
India | 20.80% | 16.70% | 9.10% | 13.40% | 14.0% |
Asia Pac | 6.20% | 7.00% | 9.50% | 7.50% | 4.7% |
ME | 3.20% | 8.20% | 8.60% | 11.30% | 15.2% |
Hiring is expected to remain muted in this quarter as well, analysts have projected.
TCS | Q3FY22 | Q4FY22 | Q1FY23 | Q2FY23 | Q3FY23 | Q4FY23 | Q1FY24 |
Headcount | 5,56,986 | 5,92,195 | 6,06,331 | 6,16,171 | 6,13,974 | 6,14,795 | 6,15,318 |
Net QoQ | 28,238 | 35,209 | 14,136 | 9,840 | -2,197 | 821 | 523 |
| Attrition | 15.30% | 17.40% | 19.70% | 21.50% | 21.30% | 20.10% | 17.80% |
Analysts will also watch out for the impact of GCC ramp-up, changes in strategy given the organisation restructuring, any buyback announcement or any indications of growth versus margin trade-offs since TCS’ peers have dropped the margin thresholds to defend margins.
The June quarter results of the company were subdued, in line with estimates. While constant currency revenue was flat on a quarterly basis, it rose 7% year-on-year. It was the slowest June quarter growth in over a decade, excluding the COVID-19 period.
The firm had seen weaknesses in banking, financial services and insurance (BFSI), communication and Hi-Tech. The total contract value for the first quarter of the financial year stood at $10.2 billion.
(Edited by : Amrita)
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