TCS Q4 Results, Dividend Today: IT major Tata Consultancy Services (TCS), all set to kickstart the Q4 earnings season for FY24 today, is expected to outpace IT peers on large deals, with margins seen improving due to cost optimisations, and deal wins continuing into the new fiscal year. “TCS is expected to report decent revenue growth at 1.6 per cent in CC terms due to large deal ramp ups. EBIT margins are likely to improve by around 25 bps QoQ, aided by operating efficiencies,” said analyst report by Sharekhan by BNP Paribas. According to analysts, TCS is expected to report its Q4 profit of over Rs 12,000 crore. Per a CNBC TV18 poll, the IT major is estimated to post profit for the quarter in review at Rs 12,080 crore and revenue would stand at Rs 61,400 crore.
“We build in 1.8 per cent USD/ 1.7 per cent CC QoQ revenue growth driven by traction in BFSI, retail (consumer business group) and hi-tech from the deals announced in Q4 and contribution from BSNL pass throughs. We expect EBIT margin to expand by a minimal 30 bps due to absence of furloughs and pyramid optimisation,” said ICICI Securities.
Infosys, meanwhile, will release its Q4 earnings on April 18, HCL Technologies on April 26, Wipro on April 19, Tech Mahindra on April 25, HCL Technologies on April 26, and others during the following month.
IT sector to report muted Q4 earnings
The Indian IT services companies, meanwhile, are likely to end the financial year 2023-24 on a weak footing with a Q4 earnings estimated to show subdued growth on account of the pressure on discretionary client spends and global peers lowering their near-term guidance. “We expect tier-I IT services companies to report an average constant currency (CC) revenue growth of 0.1 per cent QoQ in Q4FY24F, driven by reversal of furloughs in the banking & financial services (FSI) as well as hi-tech & manufacturing verticals offset by continued softness in discretionary spending,” said InCred Equities.
Earlier in March, Accenture had slashed its revenue guidance for the fiscal ending August 2024. It had said that it now expects revenue for its fiscal 2024 year to climb as much as 3 per cent, which is down from an earlier forecast that revenue would climb as much as 5 per cent. Accenture’s performance is largely accepted as a benchmark for the Indian IT services industry and per analysts, with Accenture cutting its revenue growth guidance along with soft growth in managed services, they have gotten a hint that companies are holding on to spending thereby impacting IT sector performance.
IT sector growth, said HDFC Securities, is expected to bottom out in Q4FY24 and recover gradually in FY25E. “The slowdown in macro is still a baseline scenario and lower discretionary spending and slower conversion from TCV to revenue is a feature and not a bug—at least in the near term—and deals will be focused on cost optimisation. Growth divergence will continue within the sector and guidance for FY25E is likely to factor in improved H2 performance,” it said, while maintaining that within tier-I IT, TCS is expected to lead growth at 1.3 per cent QoQ followed by flat growth for Infosys/HCL Tech and sequential decline for Wipro, Tech Mahindra and LTIMindtree. Within mid-tier IT, growth is expected to be led by L&T Tech at 4.2 per cent QoQ and Persistent Systems at 3.2 per cent QoQ. “Q4 growth laggards are expected to be Tata Elxsi, Happiest Minds, and Sonata within mid-tier,” it added.
Margins recovery to be muted
According to analysts, margin recovery is expected to be muted for the tier-I IT services companies. HCL Tech is expected to see a higher margin decline of around 150 bps owing to seasonality in its products business while Wipro is expected to witness a decline of approximately 60 bps on account of wage hike impact. TCS and Infosys are expected to report flat EBIT margins, per a report by Sharekhan. Among tier-II companies, it added, Coforge and Intellect are expected to show sharp margin improvement of approximately 160/100 bps respectively. Coforge is likely to benefit from complete reversal of furloughs and operating leverage while Intellect is expected to benefit from absence of low-margin GeM revenues.
Meanwhile, ICICI Securities said, “We expect margins to expand sequentially by an average 20 bps (50 bps exHCLT) due to absence of wage hikes, better utilisation and reduced furloughs. We factor in 210 bps dip for HCLT due to negative seasonality for product and platform business and segmental margin returning to normal QoQ. The sequential margin expansion may be below expectations due to extended furloughs (for some), pricing pressure, lower growth leverage and rupee appreciation.”
Recovery in deal win
The IT services sector is expected to report steady deal bookings with several large deals in Europe even as TCS is likely to report strong deal bookings. Sharekhan analysis stated that deal wins TCV for most IT service companies is likely to recover after the moderation in deal win TCVs in Q3FY24. “Management commentaries indicate that the demand environment has largely remained unchanged from the previous quarter. Large transformational deals are on hold while reprioritizing cost optimization programs continue. Revenue growth outlook for FY25 is relatively better as compared to FY24, however the demand recovery seems to be getting pushed towards H2FY25,” Sharekhan analysys report stated.
Key monitorables
Per experts at ICICI Securities, investors will focus on: 1) Management commentary on whether client discretionary spending is seeing any signs of turnaround, now that uncertainty over interest rates has reduced; 2) Signs of normalisation of elongated deal cycles; 3) Any benefit from absence of furloughs and resumption in campus hiring; 4) whether IT hiring uptick of 15.9 per cent MoM in Feb’24 is from IT services or majorly from GCCs; 4) Commentary on deal pipeline and nature of deals in the pipeline, especially on smaller deals that are more vulnerable; 5) commentary on productivity improvements due to gen AI and share of AI-led deals; and 6) conversion of deals into revenue growth, which has been an issue with Indian IT players that have reported robust TCV but subpar growth over the last three quarters.