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Informist, Wednesday, Oct. 9, 2024

By Apoorva Choubey 

MUMBAI – India's largest information technology company, Tata Consultancy Services Ltd., is expected to report a low single-digit sequential growth in topline and net profit for the September quarter. The reason for the muted earnings growth would be the weakness in some key markets like the UK and higher revenue contribution from a low-margin deal with Bharat Sanchar Nigam Ltd., according to analysts. These factors will limit the benefit of a nascent recovery in the company's crucial banking vertical in the US, stable deal wins and cross-currency tailwinds, they said.

The IT behemoth's consolidated net profit for Jul-Sept is seen rising 4% on quarter to INR 125.1 billion, according to an average of estimates of 16 brokerages. The estimates for profit after tax of TCS ranged from INR 122.5 billion to INR 128.2 billion. 

The company's consolidated revenue is likely to grow 2% sequentially to INR 641.4 billion during the September quarter, the estimates showed. The projections for net sales were between INR 637.9 billion and INR 647.8 billion. 

After the stellar demand seen in the aftermath of the COVID-19 pandemic, information technology companies have struggled with low demand for more than 18 months now. The demand for discretionary IT spending took a hit because of high interest rates, geopolitical tensions and low corporate sector growth around the world, especially in North America and Europe, which are key high-margin geographies for Indian software services exporters. TCS too has seen the impact of this slowdown, with its quarter-on-quarter revenue growth remaining below 2% for the last five quarters, but has guided for some revival starting soon. 

TCS' deal pipeline should remain healthy during the September quarter, with some positive trends being seen in the banking, financial services and insurance vertical, while the UK remains weak and needs to be monitored, noted brokerage Motilal Oswal Financial Services in a report. "The growth is expected to be 1.0% QoQ CC (constant currency), led by deal scale-up, including the BSNL deal and incremental pick-up in North America BFSI," the brokerage said.

Brokerage Kotak Institutional Equities projects $55 million of incremental contribution for TCS during Jul-Sept from the deal with BSNL. In April, TCS had said it is setting up large data centres in four regions of the country as part of its INR 150 billion deal with state-owned telecommunications company BSNL.  

During the September quarter, TCS' deal wins are likely to be around $10 billion, brokerage Kotak Equities said. This would be higher than $8.3 billion in Apr-Jun but lower than $11.2 billion in the same quarter of the previous financial year.

Analysts are divided about how TCS' earnings before interest and depreciation margin may fare during the quarter. Some believe an inferior mix due to higher sequential revenues from BSNL, investment in talent development and training, and lower utilisation levels will keep the company's operating margin flat from a quarter ago. Others, including Axis Securities, expect depreciation of the rupee against the dollar and stable deal wins to help profitability expand. The estimates for the company's EBIT margin range from 24.6% to 27.0%. During Apr-Jun, TCS had reported an EBIT margin of 24.7%. 

When compared year-on-year, the company's performance is better, but not by much. Its bottomline is seen up 10%, while net sales are seen rising 7%. TCS is expected to report earnings after market hours on Thursday.

KEY MONITORABLES

Investors will monitor the company's comments on the overall demand and pricing environment and deal pipeline, analysts said. Focus would also be on commentary on the European market, which remains challenging despite multiple mega deal wins over the past year, they said.

The prospects of the financial services vertical and views on the loss of share to insourcing at large clients will also be monitored. Investors would also want to know if TCS' management is seeing a revival in discretionary spending, with interest rates coming down now.

The outlook for other verticals such as retail, manufacturing and communications will also be on the radar of investors. They will also monitor any guidance on the anticipated impact of furloughs in Oct-Dec and the hiring plan for coming quarters, including the onboarding of freshers.

The company's shares closed flat at INR 4,252.95 on the National Stock Exchange Wednesday. Since the company reported earnings on Jul. 11, its shares have risen over 8%, in line with gains in other large-cap IT stocks, as investors started pricing in better discretionary spending in the second half of the current financial year.  

Following are the Jul-Sep earnings estimates for TCS based on reports from 16 brokerage houses:

End

US$1 = INR 83.96

Edited by Saji George Titus

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