IT services major Tata Consultancy Services (TCS) will report its earnings for the quarter ended September 2023 today. The software service exporter in India is expected to post a modest revenue growth dragged by lower discretionary tech spends and delay in execution of deals. Experts and analysts said that the softness observed in the past two quarters will continue, despite strong deal flows, as profit realisation will require time and should translate to a strong recovery in H2FY24.
“We expect TCS to post a low single-digit growth in revenue sequentially as slowdown in the IT sector due to adverse macroeconomic conditions in the last two quarters persists. Although the quarter saw huge deal wins, its reflection in the profitability of the company will be delayed,” said Dhruv Mudaraddi, Research Analyst, Stoxbox.
“With its 800-million-pound deal with Jaguar Land Rover (JLR) and an 840-million-pound deal with NEST, UK’s largest workplace pension scheme, the company’s total contract value is estimated to be around $12 billion. The company’s EBITDA margins are expected to improve sequentially after a 120 bps decline in the June quarter due to wage hikes,” added Dhruv Mudaraddi.
According to a poll by CNBC TV18, TCS is expected to post Q2 revenue at Rs 60,160 crore and the quarter profit at Rs 11,162 crore.
Kawaljeet Saluja, Head of Research, Kotak Institutional Equities, “We forecast marginal revenue growth due to persisting weakness in discretionary spends across several verticals. Revenue growth to moderate to 3.2 per cent on YoY comparison. We do not forecast any revenues from the BSNL deal. We forecast a 67 bps QoQincrease in EBIT margin to 23.8 per cent, primarily aided by operating efficiencies. The YoY decline is largely due to a slowdown in growth and increase in travel and other back-to-office costs.”
Kotak Institutional Equities further stated that TCS has announced multiple large deals and mega deals with JLR. Furthermore, Tejas Networks announced a ~$900 mn contract from TCS as part of the BSNL deal. We forecast TCV of deal wins, including the BSNL deal, at $12 bn, a YoY growth of 48 per cent.
Dinesh Gupta, Fund Manager, Torus Oro PMS, said, “For Q2FY24E, we expect TCS to post revenue growth of ~1 per cent QoQ due to persisting weakness in discretionary spends across several verticals. EBIT margin to improve by ~60 bps to 23.8 per cent primarily aided by operating efficiencies. TCS continues to win large deals, but we would closely watch for the management commentary on demand scenario.”
Elara Capital further added that weak discretionary spending in North America and the impact on old managed services deals may dampen momentum. However, there is an expectation of some growth support from energy, lifesciences, and manufacturing (due to the JLR deal worth $1 billion), while weakness is expected to continue in telecom.
Kumar Rakesh, Analyst – IT & Auto, BNP Paribas India, said that the brokerage firm expects USD revenue growth of 1.5 per cent QoQ due to the continued impact of a slowdown related to a cut in discretionary tech spending, partially offset by large deal ramp-ups. “We model a 69bp q-q EBIT margin expansion to 23.8% on the back of operational efficiencies,” he sai.
Meanwhile, Apurva Prasad, Vice President – Institutional Research, HDFC Securities, said that the overall IT sector is expected to deliver a soft quarter, although Q2 has historically been a seasonally strong quarter. “The big news is that not much has changed in the past few months. Most of the demand indicators are trailing 10-15 per cent below levels at the beginning of the year and only slightly better than the July lows; the supply-side factors remain favourable, supporting operational resilience despite soft growth,” Apurva Prasad said.
Within tier-I IT, HDFC Securities expects TCS/INFO/WPRO/TECHM/LTIM to deliver sequential growth of +1.6 per cent, +1 per cent, -1.4 per cent, -1 per cent and +1.5 per cent. In terms of margin performance, TCS and HCLT are likely to outperform, while the margins of LTIM and TECHM are expected to decline by 120bps and 75bps respectively, it said.
Key monitorables
In terms of key monitorables, Kawaljeet Saluja from Kotak Institutional Equities said, “Management commentary on the state of demand, especially in critical financial services and North America, will be keenly watched. We expect investor focus on (1) discretionary spending trends, especially in the critical financial services vertical, (2) pipeline of cost take-out and vendor consolidation decisions of clients and win-rates, (3) changes to strategy, key bets and priorities of the organization under a new CEO, (4) health of impacted verticals/geos, especially financial services, telecoms and North America, (5) the impact of the GCC ramp-up on growth of companies and (6) levers to defend and increase margins.”
TCS is optimistic about Generative AI as it is working on multiple proof of concepts, with c100 opportunities in the pipeline. “We see TCS benefiting, both on demand and cost, from GenAI’s new use cases and higher productivity. Also, TCS still aspires to get the EBIT margin back to 26-28 per cent and end FY24 with a higher margin YoY,” said Kumar Rakesh from BNP Paribas India.
TCS has, earlier in July, posted its fiscal first quarter profit at Rs 11,074 crore, up 16.8 per cent in comparison to Rs 9,478 crore during the same period last year. The IT services major posted its revenue from operations for Q1FY24 at Rs 59,381 crore, up 12.6 per cent as against Rs 52,758 crore during the first quarter of FY23.