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TCS Q1 preview: Analysts see up to 36% YoY PAT rise; operating margin eyed

Information technology (IT) services major Tata Consultancy Services (TCS) will kick-off the June quarter earnings season (Q1FY22) on Thursday when it will post its quarterly numbers.

India's second-most valuable company, in terms of market capitalisation, is expected to post a stellar show in the first quarter of the financial year 2021-22 (Q1FY22), with profit after tax (PAT) expected to rise between 30-36 per cent and revenue 19-20 per cent, on a yearly basis, analysts said, and expect a low base of last year, strong seasonality, digital traction and ramp-up of deals to drive TCS' Q1 performance.

While the company's margins are expected to take a hit, impacted by wage hikes, deal TCV is likely to be strong. Global brokerage Nomura expects TCS to reiterate higher than double-digit revenue growth in FY22 and to retain its aspiration to hit double-digit growth over the medium term.
"Outlook on the sustainability of double-digit revenues, trends in digital, margin outlook, talent management, offshoring trends, deal pipeline and other long term trends will be of investor interest," said Devang Bhatt, analyst at ICICI Securities.

Profit & Revenue Expectations
ICICI Securities sees 35.7 per cent year-on-year (YoY) growth in Q1 profit after tax (PAT) at Rs 9,512.6 crore, mainly led by higher other income. This is against Rs 7,008 crore posted in the same quarter last year. Sequentially, PAT could rise 2.9 per cent from Rs 9,246 crore in the March quarter of FY21.

Global brokerages Nomura and HSBC, meanwhile, eye 33 per cent and 33.5 per cent increase in PAT to Rs 9,320.2 crore and Rs 9,356, respectively. Sequentially, the figure could remain flat. Jefferies, at the lower end of the spectrum, pegs the Q1 PAT at Rs 9,002.5, down 2.6 per cent quarter-on-quarter (QoQ).

The revenue (in rupee terms) is likely to jump 20 per cent YoY and 5.3 per cent QoQ to Rs 46,042.7 crore, led by anticipated improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies and ramp-up of deals, said ICICI Securities.

It expects TCS to register 4 per cent QoQ growth in constant currency (CC) terms. "Cross-currency tailwind would lead to revenue growth of 4.2 per cent QoQ in dollar terms. In rupee terms, revenue growth is expected to be higher than dollar growth due to rupee depreciation," it added.

HSBC pegs the figure at Rs 45,736.8 crore, up 19.5 per cent YoY as against Rs 38,322 crore posted in the year-ago quarter. Sequentially, it could rise 4.6 per cent from Rs 43,705 crore posted in the March quarter. We forecast constant CC growth of 3.5 per cent QoQ in Q1 on marginal tailwinds of 10b bps, the brokerage said.

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Its sees Q1 dollar revenue at $6,205 million, up 22.6 per cent YoY and 3.6 per cent QoQ. The figure stood at $5,059 million at the end of Q1FY21 and at $5,989 million in Q4FY21.

Jefferies, meanwhile, expects revenue (in rupee terms) to grow 19 per cent YoY and 4.3 per cent QoQ to Rs 45,598.6 crore. It pegs dollar revenue at $6,185 million, up 22.3 per cent YoY and 3.3 per cent QoQ. "We expect TCS to deliver 3.1 per cent QoQ CC revenue growth driven by strong deal momentum and ramp-up of previous deals," the brokerage said.

Margin Headwind
Amid higher wage inflation and supply-side pressures, the IT sector is expected to see margin headwinds in Q1, with TCS as no exception.

Nomura expects TCS' earnings before interest and tax (EBIT) margin to decline 80 bps on a QoQ basis to 26 per cent from 26.8 per cent. Yearly, they could expand by 240 bps from 23.6 per cent posted a year ago. "Sustainability of the EBIT margins in light of recovery in travel costs and rising supply-side pressures is a key monitorable for the investors," Nomura said.

Brokerage HSBC expects margins to contract by 130 bps in Q1, driven by wage hikes that were effective from April 1, to 25.5 per cent. Weak rupee and operational gains could partially offset this impact, it added. On a YoY basis, it could grow 190 bps. 

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