The expectations from TCS for Q3 are so poor — there may be room for surprise

The expectations from TCS for Q3 are so poor — there may be room for surprise
Tata Consulancy Services (TCS) earning expectations for Q3 2020BCCL
  • Tata Consultancy Services (TCS) will post its third-quarter earnings on January 17.
  • The quarter is seasonally weak of IT companies and TCS is expected to post moderate growth.
  • Key announcements to look out for are updates around budget trends for 2021, the slowdown in banking and retail, and future hiring.
Tata Consultancy Services (TCS) will post its third-quarter earnings today. Estimates are as low zero growth in dollar revenue, but as seen in the case of Infosys even a 1% growth was enough to cheer the market.

At today's opening bell TCS was trading at ₹2240.75 and on the rise.

The company’s banking, financial services and insurance business continues to be weighed down by the softness of European banks amid the crisis. Retail will also continue to see pressure due to macro-economic factors. However, manufacturing and communications are forecast to post strong growth.

"TCS is expected to post a moderate growth of 1.1% quarter-on-quarter in USD terms," states Narlonia’s market analyst, Niharika Ojha.

Revenue growth could end up being even lower considering furloughs and last quarters numbers that fell below expectations, according to Nirmal Bang.

EBIT margins are expected to improve by 50 basis points (bps) to 24.5% since the last quarter has been free of wage hikes and improvement in operational efficiency.

However, the additional costs of external consultants will continue to drag margins that may keep TCS from achieving its goal of widening margins to 26-28% by the end of the year.

In light of lower revenue growth as well as slower growth of other incomes, profits are expected to decline by a quarterly 1.3%.

Announcements to track
Today’s earnings call will be integral to establish the outlook of budgets and client spending in 2021 — considering the US and European markets that are currently under stress.

Supply-side commentary on onsite talent, localisation, sub-contracting and availability of offshoring lever, are also key monitorables according to HDFC Securities’ report.

Till now, TCS has managed hiring and attrition better than its peers, like Wipro and Infosys. Trends for onboarding new talent in the coming year will also be key for the company.

See also:
HCL Tech and Tech Mahindra may post better earnings as Euro bank crisis affects Infosys, Wipro

Infosys has raised full-year growth guidance⁠— the stock market was a step ahead of it

US - Iran tensions strengthen dollar giving boost to Indian tech stocks