TCS Q2 results today, may get major boost from key deals during quarter

India's largest IT services firm Tata Consultancy Services is expected to see its revenue grow 2-4 per cent in the July-September quarter on increased deals from North America and UK and improved spending by banking clients, say analysts.

The Tata group company will kick off the quarterly results for Indian IT services sector on Thursday, which is looking to see higher growth returning on the back of improved economic scenario in its main markets such as the United States and Europe.

IT firms have lately been battling technology shifts that have made global firms to cut their budgets on traditional IT services, while increasing it for newer services such as digital and cloud.

Wipro will declare its second quarter results on October 17 and Infosys, which has seen its co-founder Nandan Nilekani back at the helm will announce its numbers on October 25.

A key headwind that the IT industry will face is the cross currency movements, which would affect revenues between 90 and 140 percentage points, besides concerns on spending by retail clients.

Brokerage Edelweiss has estimated a conservative 2.4 per cent revenue growth over last quarter to Rs 29, 977 crore and an EBIDTA of Rs 7,943 crore. Absence of Visa costs and wage hikes are expected to impact EBIDTA while BFSI and retail will continue to be monitored.

"With Accenture reporting robust 19.6 per cent YoY jump in new bookings in outsourcing contracts, outlook for IT appears to be improving. While return of spends in BFSI and retail are key revenue drivers, we believe companies will continue to report robust growth in digital services with higher number of digital transformation deals," analysts Sandip Agarwal and Pranav Kshatriya wrote in a note on October 6.

Demand for offshore IT, cloud analytics and security products from continental Europe will remain strong, noted Bloomberg.

Brokerage IDBI has forecast a constant currency growth of 2 per cent quarter on quarter with cross currency tailwinds having an impact of 140bps. Growth in digital services and large deal wins through the quarter have put revenue estimates for TCS at Rs 30,534 crore, which is 3.2 per cent growth over the last quarter. EBIT margins will jump to 25.1 per cent up from 23.4 per cent last quarter but lower than 26 per cent last year.

Lloyds Banking Group's pension project that has awarded TCS a deal for servicing four million policies is significant as it is the first major UK-based deal since "Brexit" , noted Elara Capital. The report has pegged revenue estimates at Rs 30,668 crore and profit estimates at Rs 6,095 crore falling 7.5 per cent over last year. EBITDA is estimated to jump almost 8 per cent to Rs 8,016 crore.

"We expect the commentary to be good given the recent large deal win with Scottish Widows, a part of Lloyds Banking Group. Since TCS already absorbed the wage hike, we expect EBIT margin improvement of 110 bps over Q2 including gains from cross-currency. However, hedging gains will be lower compared to last quarter given the higher end point for the INR against the USD. So we expect net income to be up only 2.8 per cent QoQ despite EBIT increasing by 8.6 per cent QoQ," said Ravi Menon, IT and Telecom analyst at Elara Capital. Cross-currency gains of 90 bps will help TCS report 3.9 per cent QoQ growth in USD terms is expected, he added.

Analysts say while the sector sees improved growth, performances of individual companies could differ due to the nature of these firms.

"There can be a lot of variation between performances so it wouldn't be fair to expect the same results from different companies in the sector. However, margins between 24.5 to 25.5 per cent will be expected while BFSI and retail will remain sectors to watch out for in terms of performance," said Harit Shah, research analyst at Reliance Securities. Constant currency growth in this traditionally strong quarter will be keenly watched by the industry, he added. 

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel