TCS gains 9% in 4 days ahead of Q1 nos on Thursday; stock nears record high

For TCS, analysts build in a 5 per cent QOQ US$ revenue fall with nearly 50bps cross-currency headwinds.
Shares of Tata Consultancy Services (TCS) were trading higher for the fourth straight day, up 3 per cent at Rs 2,269 on the BSE on Monday ahead of its first quarter (April-June) earnings of the financial year 2020-21 (Q1FY21) on Thursday. The stock was trading at its highest level since November 2019 and was just 1 per cent or Rs 27 away from its all-time high level of Rs 2,296, touched on September 3, 2019, in intra-day trade.

In the past four trading days, the IT services major has seen its share price surging 9 per cent after the company on June 30, said its board will meet on July 9 to approve the financial results for June quarter. The board will also consider the declaration of interim dividend to equity shareholders, it added.

Indian Tier I techs will have a weak June’20 quarter, with sequential revenue falling 4-8.1 per cent. EBIT (earnings before interest and tax) margin decline, however, may be limited by currency depreciation and other cost optimisation measures, analysts at Emkay Global Financial Services said in sector update.

The brokerage firm sees greater confidence around the underlying belief on stability in business in Sep’20, with growth recovery in H2FY21 along with an outlook on pricing, possible offshore shift, and the likelihood of leveraging balance sheet strength for inorganic growth.

For TCS, analysts build in a 5 per cent QOQ US$ revenue fall with nearly 50bps cross-currency headwinds. EBIT margin decline is expected to be limited to 80bps QoQ on account of tight cost optimisation (freeze on discretionary spending, hiring, etc.), lower travel costs, subcontracting expenses and currency depreciation despite revenue drop. The brokerage expects a 3.6 per cent QoQ /4.5 per cent YoY fall in net profit.

Analysts at IDBI Capital forecast TCS revenue to decline by 6.5 per cent and cross-currency impact of -65bps. EBIT margin to decline by 85bps QoQ with headwinds from a decline in revenue offset by rupee depreciation, lower travel cost, lower variable payout, and operational efficiencies.

Key things to watch out for include demand trends in key verticals like BFS, retail, and manufacturing, outlook on pricing and possible client demand for lower rate cards around WFH (work from home) delivery, margin outlook (TCS had suggested that it may get back to similar margins as the Mar'20 quarter by Mar'21, and levers to defend margins in the wake of revenue / pricing pressure), brokerages said.

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