At a Tata Consultancy Services (TCS) briefing, we had the following takeaways: Demand trends are positive, as expected at the beginning of the year. Q2 is expected to be in line with seasonal trends (H1 to be better than H2) and will also see the full contribution from Alti (30 million euro) and cross currency impact of ~100-150 bps.
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 ó 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.