Growth in total contract values and margins likely to remain flat sequentially. Headwinds from high inflation in the US and Europe and backfilling likely to be offset by scale and efficiencies.
Tata Consultancy Services (TCS) will kick off the result’s season for Nifty50 companies. Experts expect Q4FY22 to be another strong quarter for Indian IT players in terms of growth despite high base as Tier-II companies will likely outperform Tier-I companies yet again. Margins headwinds are expected to intensify with supply side pressures (retentions, promotions, ESOPs, etc) further accentuated by high inflation in the US and Europe leading to onsite salary pressures partly visible in the quarter ended March.
Growth is expected to be broad-based across verticals for the second largest Indian company in terms of market capitalisation. The firm continues to witness strong demand across technology segments aided by strong client requirements for cloud and digital transformation, data analytics, artificial intelligence, Internet of Things (IOT), 5G rollouts and cyber security.
Consolidated profit after tax for TCS may jump 8 percent on year to Rs 10,000 crore in the quarter ended March while consolidated revenues are expected to grow 15.5 percent on year to Rs 50,500 crore, said experts tracking the company.
The company had reported a profit of Rs 9,246 crore and revenue of Rs 43,705 crore in the corresponding period of previous financial year. Consolidated profit for the preceding quarter of the current financial year (October-December 2021) stood at Rs 9,769 crore on revenue of Rs 48,885 crore.
Kotak Institutional Equities pegs growth in dollar revenues at 11 percent on year to $6,649 million while constant currency revenues are expected to grow 12.9 percent on year and 2.4 percent on a sequential basis.
It expects the company to report revenues of Rs 50,067 crore for the quarter at an annualised growth rate of 14.6 percent and a sequential rate of 2.4 percent.
“Anniversary of a couple of European deals can create modest headwinds but overall growth will be led by general strength in discretionary spending and digital transformation programmes,” Kotak said.
Motilal Oswal Financial Services suggests: “TCS remains best positioned to benefit from long term structural tailwinds in tech services and should see a relative pickup in growth as the base effect and increased aggression aid it.”
It expects the company to report 12.3 percent growth on year in dollar revenues to $6,726 million while revenue in rupee terms is expected to grow 15.7 percent on year to Rs 50,600 crore, a sequential rate of 3.5 percent.
“Growth should continue to remain in a narrow band for TCS, despite strong demand momentum,” Motilal Oswal said.
Global brokerage firm Nomura estimates 11 percent on year growth in dollar revenues to $ 6,648 million while in constant currency terms revenue is expected to register sequential growth of 2.5 percent.
According to Nomura, rupee revenues are likely to increase by 14.1 percent on year to Rs 49,860 crore, an increase of 2 percent on quarter.
Experts expect deal wins in Q4FY22 to remain stable as compared to Q3FY22.
“We expect TCV (total contract value) of deal wins to exceed $8 billion, which is a decline on a year on year basis, but is steady growth on a sequential basis,” Kotak said.
Margins
Analysts expect the company to maintain stable margins on a sequential basis, while on an annualised basis margins are seen declining 180 basis points (bps).
“We forecast stable EBIT (earnings before interest and taxes) margin– headwind from backfilling of attrition will be offset by scale and efficiencies,” Kotak said.
Kotak expects EBIT margins for the quarter at 25 percent which is almost the same as the previous quarter. On a yearly basis, Kotak sees a decline of 183 bps from 26.8 percent margins reported in the same period of last year.
Nomura and Motilal Oswal concurred with Kotak and expect the company to report EBIT margins of 25 percent for the quarter.
Profitability
The profit after tax for the quarter is expected to grow between 7 and 9 percent on year.
Kotak sees profits rising 7 percent on year and 1.3 percent sequentially to Rs 9,893 crore.
Motilal Oswal expects profitability to increase 8.9 percent on year and cross the Rs 10,000 crore mark. Sequentially growth in profit is seen at 3.1 percent.
Key monitorables
Investors will be focusing on the impact of recent macro-economic developments on budgets/outlook; demand trends in key verticals like BFSI (banks, financial services and insurance), retail, manufacturing and communications; reasons for relative underperformance in growth rates and for lack of large deal momentum; duration over which supply side challenges will persist and measures to manage the same; levers to defend margins and timeframe when EBIT margins will recover to 26-28 percent band; pricing environment considering high inflation and tight labour markets; regional market outlook; and management commentary on any impact on tech spending from higher energy prices, inflation and potential economic slowdown.
The TCS stock ended flat at Rs 3,685.65 at the close on April 8 at the National Stock Exchange. The stock has gained 2.4 percent in the past one month and has generated returns of 11.1 percent during the past one year.
