TCS may report higher Q2 margin on Thursday; weak rupee to help firm

Rajesh Gopinathan, Chief executive officer and managing director
At Tata Consultancy Services’ (TCS’) announcement on Thursday of its second quarter (Q2, July-September) earnings, analysts will be watching the Mumbai-based company’s commentary on three of its segments.

These being BFSI — banking, financial services and insurance — manufacturing and retail. The segments are expected to give a broader sense about the information technology (IT) services sector’s performance in the quarter. 

TCS, the IT bellwether, is expected to benefit from a weaker rupee and stronger North American growth in the quarter. However, client-specific challenges with regard to some banking and manufacturing clients in Europe, and some semi-conductor and equipment vendors, are likely to play a key role on whether it ends 2019-20 with strong double-digit growth, say analysts. 

The banking and financial services segment, especially capital banking, has been stressed for a while in Europe. Among the top Indian IT players, TCS is at the forefront of implementing some of the large projects in this space. Its order bookings and commentary on this will be keenly watched. 

Analysts will also seek clarity on revenue inflow from large deals, with the company having started disclosing the total contract value (TCV) from these. In Q1 (April-June), it had reported outsourcing contracts with TCV of $5.7 billion, making it the fourth quarter in a row of signing deals more than $5 billion. 

“We believe continued pressure building up from the Europe BFSI will make TCS' double-digit revenue growth challenging. (We also) Expect deal closure to be soft, due to a volatile macro environment,” said Aniket Pande, research analyst at brokerage Prabhudas Lilladher. 

According to the latter entity, TCS is likely to report constant currency revenue growth of 3.2 per cent (quarter on quarter). And, operating margin is likely to expand by 150 basis points (bps), supported by rupee depreciation, absence of wage hikes and visa costs. On a year-on-year (YoY) basis, the margin might see a decline, due to limited talent supply and increase in the US cost structure. 

TCS had in Q1 shown steady performance, by sustaining double-digit growth. It had reported a 11.4 per cent rise over a year in revenue at Rs 38,172 crores; this was 0.4 per cent higher over the preceding quarter. In dollar terms, revenue at $5.48 billion, had grown 8.6 per cent over a year; in constant currency, the rise was 10.6 per cent. However, the revenue in dollar terms missed Street estimates. 

“TCS will likely report reasonable growth, with challenges in the financial services and retail verticals. We expect constant currency revenue growth of 2.6 per cent and cross-currency headwind of 75 bps on a quarter-on-quarter basis. Q2 of FY19 had a high revenue base and will likely result in a deceleration in YoY constant currency growth to a single digit,” reported Kawaljeet Saluja, research analyst at Kotak Securities.

He feels net profit growth is likely to be modest, due to completion of its buyback programme. Progress on localisation initiatives in the North American markets will be watched, as that will guide the changing cost structure situation in the region. IT companies across the board have been coping with increasing localisation requirements by hiring from American universities and going for contractual staff, both of which have impacted employee cost.

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