TCS is seeing a broad-based recovery across verticals. In telecom, while TCS is winning deals due to penetration into newer areas, the underlying weakness continues. Among geographies, demand is led by a recovery in the US and increasing penetration in Europe. Smaller markets (like India) could show more volatile trends.
The company continues to maintain its operating margins in a stable range (constant currency), including the impact of Alti/promotions in the quarter. Q2 is likely to see tailwind of ~275-350 bps due to the sharp rupee depreciation q-o-q. TCS is looking to wait for the currency to stabilise, before reinvesting the gains either into the business or buy options to set a floor for the currency.
TCS has not seen price cuts from competitors to pass on currency benefits. Interest income will be likely lower (down ~R1 lakh crore q-o-q) due to large dividend payout. Management expects FX losses of ~R5.5-7 lakh crore in the quarter, largely attributed to the range options taken by the company (at ~50% of contracts now).
Management commentary on demand continues to point to good growth in FY14. R depreciation is an added tailwind that gives companies the leeway to invest in local hiring, competencies, and SG&A. We remain constructive on the sector.