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Q3 result preview: Here's what brokerages expect in TCS' Oct-Dec numbers

Information technology (IT) bellwether Tata Consultancy Services (TCS) is likely to have put up a muted show in the third quarter of the 2019-20 financial year (Q3 FY20), the financial result for which it will announce on Friday. The company witnessed higher furloughs during the December quarter than in the corresponding quarter of FY19, especially in the Banking and Financial Services (BFS) vertical. Apart from a weakness in the capital markets segment and certain large banks in the US and Europe, fundamentals may have been sluggish in the retail vertical as well, say analysts.

HDFC Securities expects TCS' Q3 revenue to be $5,589 million, up 1.3 per cent on a quarter-on-quarter (QoQ) and 6.5 per cent on a year-on-year (YoY) basis. It has factored in 0.7 per cent revenue growth in constant currency (CC) terms, aided by a cross-currency tailwind of 60 basis points (bps). The company’s revenue in rupee terms is estimated at Rs 39,792 crore, up 2.1 per cent QoQ and 6.6 per cent YoY.

The brokerage expects TCS’ earnings before interest and tax (Ebit) margin in Q3 to be 24.3 per cent, up 24 bps QoQ, supported by the rupee’s depreciation and cross-currency impact. Adjusted profit after tax (APAT) is estimated at Rs 7,963 crore, down 1 per cent QoQ and 1.7 per cent YoY.

In the year-ago quarter, TCS had reported 24.1 per cent YoY growth in net profit to Rs 8,105 crore. Its revenue in the quarter had been Rs 37,338 crore, up 20.8 per cent YoY. In the September quarter of this year, the company posted a 1.8 per cent YoY rise in net profit to Rs 8,042 crore. On a sequential basis, the numbers slipped 1.09 per cent.

Analysts at Emkay Global Financial Services estimate TCS' net profit or profit after tax (PAT) to grow 1.8 per cent QoQ and 1 per cent YoY to Rs 8,187.1 crore. Net sales (revenue) are seen at Rs 40,110 crore, up 7.4 per cent YoY and 2.9 per cent QoQ. Earnings before interest, tax, depreciation, and amortisation (Ebitda) is expected to rise 8.5 per cent YoY and 7 per cent QoQ to Rs 10,939.4 crore. Ebitda margin is likely to rise 27 bps QoQ to 27.3 per cent. On a YoY basis, the margin is expected to see a jump of 104 bps. They have built in a 1.2 per cent revenue growth QoQ in CC terms, with nearly 90-bp QoQ cross-currency tailwinds.

"We expect Ebit margins to increase by 50 bps QoQ to 24.5 per cent, given the benefit of the rupee’s depreciation and improvements in utilisation/pyramid, as the company is unlikely to backfill attrition fully, given soft near-term demand. Though TCS has the flexibility to scale back a bit on variable compensation, given benign attrition, that is unlikely to be executed because of a strong pipeline and deal intake execution, as well as the fact that full-year revenue growth will still be respectable at around 8 per cent in CC terms in FY20,” said ICICI Securities in an earnings preview note.

Some of the key things to watch out for in the company’s December-quarter result are its outlook on client budgets and spends for 2020 calendar year, outlook on a challenged US/Europe capital market/banking segment and select retail and consumer packaged goods (CPG) and digital revenue performance and large account metrics. Besides, total contract value (TCV) of deal wins, outlook on the Europe geography (key growth driver) and commentary on macro trends impacting client spend and performance and outlook of key verticals – BFSI/Retail & CPG also remain key monitorables.

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