Tata Consultancy Services
The first earnings season for the financial year 2023 will kick start tomorrow and as has become customary over the past few quarters, India’s largest IT services provider Tata Consultancy Services (TCS) will open the innings this time too.
Experts look forward to a healthy on-year revenue growth for the Indian IT services sector that was aided by a secular demand environment, healthy deal wins, and mergers and acquisitions. They expect a steady sequential USD-reported revenue growth but it may be affected by adverse cross-currency and seasonality for a few companies in the sector.
For the bellwether of Indian IT services sector, TCS, the expectation is that the company will report a consolidated revenue growth of 15-16 percent on-year and 4-5 percent on-quarter for the first quarter ended June 2022. The company is expected to log in consolidated revenues of Rs 55,600 crore for the quarter.
The consolidated profit after tax (PAT) for the largest Indian IT services company, is expected to rise by 10 percent on-year but is likely to remain flat on a sequential basis. TCS is expected to post a bottomline of Rs 9,800 crore.
The company had recorded a consolidated net profit of Rs 9,008 crore during the corresponding period of last financial year when its consolidated revenues stood at Rs 45,411 crore. TCS had registered a PAT of Rs 9,926 crore during January to March 2022 period on revenues of Rs 50,591 crore.
USD and constant currency revenues
Experts expect the dollar revenues for the company to grow by close to 11 percent on year and ~2 percent sequentially while constant currency (CC) revenues are expected to grow by 3.5 percent sequentially.
“We expect CC revenue growth of 3.7 percent QoQ (2.3 percent QoQ in USD) on strong momentum in digital transformation programs while we expect growth to be broad based across verticals”, a report from the brokerage firm Phillip Capital said.
A report from Emkay Research expect 2.1 percent sequential revenue growth in US dollar terms as its factors in 190 basis points cross-currency headwinds.
Service line revenue mix between change the business and run the business is likely to remain similar to global tech spending. “TCS has diversified its presence across verticals, geographies and service lines and is likely to be beneficiary of large cost-takeout deals and vendor consolidation deals,” a report from ICICI Securities said.
Margins
An uptick in wages and travel and visa costs is likely to impact the margins during the quarter both on a yearly and sequential basis.
The EBITDA (earnings before interest, tax, depreciation and amortization) margin is likely to dip 190 bps on-year and 140 bps on-quarter to 26 percent.
“Margins are expected to decline by 140 bps sequentially due to wage hikes, travel costs while supply side pressures are likely to be offset by the currency depreciation,” a report from Phillip Capital said.
The brokerage expects the EBIT margin to trip to 23.6 percent for the reported quarter compared to 25.5 percent during the same quarter a year ago and 25 percent in the quarter ended March 2022.
ICICI Securities has worked out an EBIT margin of 23.5 percent, while Motilal Oswal Financial Services forecasts it at 23.9 percent.
Key things to watch out for
The experts will be closely watching the management’s comments on the demand trends in key verticals like BFSI, Retail, Manufacturing and Communications along with the deal intake/pipeline in Q1. Another key parameter to watch out for will be the price environment considering high inflation and tight labor markets as well as margin outlook, supply side challenges and attrition.
Experts at Emkay Research will also be looking for updates on regional markets outlook, any impact on tech spending from higher energy prices, inflation and potential economic slowdown/recession and if there are any delay/deferral/cancellation of projects due to macro uncertainties, high inflation and supply chain disruptions.
However, according to Motilal Oswal Financial Services, TCS remains best positioned to benefit from the long-term structural tailwinds in Tech Services and should see a relative pickup in growth as the base effect and increased aggression aid it.
TCS stock closed Rs 27.1 higher at Rs 3,287.85 on July 7. The stock has been trading flat over the past one month as well as past one year.
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