TCS to report solid revenue growth, margin expansion in Q2 aided by strong deal execution, rupee depreciation
- Most analysts expect 3% revenue growth in constant currency for TCS in the September quarter led by demand across sectors.
- TCS is expected to post the best margin improvement of up to 50 basis points, much higher than the sectoral estimates of 30 basis points, according to Jefferies.
- Management commentary on growth outlook, client spending and hiring plans will be tracked.
AdvertisementThe earnings season for the July-September quarter will kick off with IT major Tata Consultancy Services (TCS) announcing its results on October 10.
Most analysts have forecast a 3% quarter-on-quarter revenue growth in constant currency for TCS in the September quarter led by demand in all sectors while margins are expected to improve.
“Revenue growth momentum is expected to continue on strong deal execution while margins are expected to improve sequentially as wage hike is behind now,” said a report by ICICIdirect. TCS is expected to register 3% QoQ growth in constant currency led by continued improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies and ramp up of deals, the report added.
Analysts at Edelweiss Research also predict TCS to report revenue growth of 0.8% QoQ in USD and 3% QoQ in CC. “The company is expected to post margin expansion of about 60bp QoQ led by operating leverage, FX benefit, and improving utilisation partially offset by travel cost and supply-side pressure,” they said.
On October 10, the rupee recorded a new low of 82.70 against the US dollar on expectations of aggressive monetary policy tightening by central banks and rising crude oil prices.
The dollar’s soaring strength against the rupee is bad news for the economy but good news for sectors making money in dollars like IT, pharma and so on.
“The revenue growth of Indian IT companies is expected to continue in Q2, however margin expansion is likely to be restricted due to continued high attrition,” ICICIdirect added.
However, according to Jefferies, TCS is expected to post the best margin improvement of up to 50 basis points, much higher than the sectoral estimates of 30 basis points.
“We estimate EBIT margins to improve by 50bps QoQ to 25.6%, driven by pyramiding, operating leverage and pricing benefit, amidst continued pickup in travel/discretionary expenses and supply side pressures,” the Jefferies report said. Jefferies estimates TCS’ revenue to grow at 3.5% in constant currency for the quarter.
Further, in today’s earnings results, investors will watch out for demand outlook in key verticals like BFSI, retail, large deal wins, margin outlook for FY23, attrition and supply side pressures, and deal pipeline amid weak macroeconomic environment.
AdvertisementManagement commentary on growth outlook, client spending and hiring plans will also be tracked.
During the first quarter of FY23, TCS posted a 5% year-on-year growth in net profit but on a quarterly basis, this fell 5% hurt by increased costs – most of it in employee benefits. Travel costs too ate into its profits. Its revenue in constant currency grew 15.5% on a yearly basis.
Meanwhile, ahead of the results announcement, shares of TCS were up 1.4% at a time when benchmark indices were down by 0.5%.
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