TCS Headed For Another Weak Quarter?
Will it be another quiet quarter for TCS?
India’s largest software services provider Tata Consultancy Services Ltd. is likely to post muted earnings growth in the three months ended September after below consensus earnings in the previous two quarters.
The management remains hopeful about the recovery in software and IT services for the banking and financial segment but demand has remained lacklustre for the vertical in the quarter. This weakness may be partially offset by strength in the insurance segment led by its subsidiary Diligenta Ltd and smaller emerging verticals.
Margins are likely to expand in the backdrop of a weaker rupee versus the dollar as a majority of the company’s revenue is in dollars. Wage hikes which became effective in the quarter ended June are likely to normalise.
Expectations
- Revenue likely to rise 3.4 percent quarter-on-quarter to Rs 30,585 crore, according to Bloomberg’s consensus estimate.
- Revenue in U.S. dollar terms is expected to grow 3.1 percent to $4,735 million according to data compiled by BloombergQuint.
- Operational margins may expand 110 basis points to 24.5 percent, according to Bloomberg’s consensus estimate.
- Net profit may rise 5.7 percent to Rs 6,284 crore, quarter-on-quarter.
What to Watch
Investors will keep an eye on commentary on revival in demand in banking and financial segment. The management had reorganised certain service lines under new President Krishnan Ramanujam and investors will be keen to know how these newly cast service lines will help the company become nimbler. Analysts will also watch for commentary on client budgets and spending trends.
The company posted margins well below its indicated range of 26-28 percent for the year in the previous sequential quarter, which will remain another key variable to watch.
TCS Reflective Of The Sector?
Muted earnings expectations for TCS largely mirrors the consensus outlook on India’s IT sector for the quarter. An aggregate of the top eight Indian IT companies by market capitalisation projects a 2.9 percent sequential growth in revenue with a 30 basis point improvement in margins on earnings before interest and taxes. The aggregate estimate shows a subdued 2.1 percent growth in profit for the large players in the sector.
(Expectations have been compiled from reports by Kotak Institutional Equities, UBS, IDFC Securties, Edelweiss Securities, Credit Suisse and Emkay)