Strong Rupee, Wage Hikes To Weigh On TCS’ Margins In First Quarter
TCS likely to see another subdued quarter.
India’s largest software services provider Tata Consultancy Services Ltd. is expected to post subdued earnings growth for quarter-ended June as operating margins contract and profit declines on a sequential basis.
Earnings Expectations
- Dollar revenue seen up 3.1 percent at $4,590 milion versus $4,452 million on a quarter-on-quarter basis, as per BloombergQuint’s estimates
- Total income seen 0.2 percent lower at Rs 29,588 crore versus Rs 29,642 crore in the previous quarter, as per Bloomberg consensus
- EBIT margins seen at 24.3 percent versus 25.7 percent last quarter, as per Bloomberg consensus estimates
- Net profit seen down 6.2 percent at Rs 6,200 crore versus Rs 6,608 crore on a quarter-on-quarter basis, according to Bloomberg consensus estimates
Expect Subdued Revenue Growth
With the exception of Diligenta, the company’s U.K. subsidiary which provides services to the insurance sector, consolidated revenue from the banking, financial services and insurance (BFSI) vertical is expected to see muted growth. Signs of pick-up in demand in the vertical as suggested by the management are yet to translate meaningfully into earnings. The BFSI vertical contributes approximately 40 percent to company’s consolidated revenue. Growth in the retail vertical remains a worry for the management.
Margins Could Be Lower Than Indicated Range
Bloomberg consensus reflects a sequential contraction in operating margins to little more than 24 percent, which is lower than the management’s indicated range of 26 to 28 percent. The rupee has appreciated 3.7 percent to the U.S. dollar in the quarter and a Goldman Sachs research note estimates a 1.4 to 2.3 percent cut in TCS’ financial year 2017-18 earnings per share estimate every time the rupee strengthens 1 percent. Wage hikes and increased visa charges are also likely to drag margins for the quarter.
What To Watch
- Contribution of digital revenues to consolidated income
- Digital revenues grew 29 percent year-on-year for FY17 to $3 billion (17 percent of total income)
- Performance and plans from TCS Japan
- Change in client spending trends and sentiment
- Commentary of pick up in BFSI
- Outlook on retail and manufacturing verticals
- Updates on being less dependent on H-1B visas in U.S.