TCS Q1FY19 result preview: Commentary on BFSI, digital business key

Tata Consultancy Services (TCS) is likely to announce its results for the June quarter (Q1FY19) post market hours on July 10. In the recently concluded quarter, TCS – the largest Indian IT firm by sales – announced Rs 160 billion buyback under the tender route. This is the second time in as many years that the Tata group company is resorting to a buyback.

On a year-to-date basis, the stock has rallied around 40 per cent and has outperformed the Nifty IT index that gained over 20.68 per cent during this period. In comparison, the Nifty50 index is up 2.94 per cent YTD, ACE Equity data showed. In the last quarter (Q1FY19), however, the stock gained 29% as compared to 4.53% rise in the Nifty50 index.

Outlook for key verticals including BFSI, retail and telecommunications and return of cash to shareholders is a theme that continues to play out with TCS, according to analysts.

Here is a quick compilation of what they expect from TCS’ Q1FY19 release:

Reliance Securities

Dollar revenue for TCS is expected grow 2 per cent quarter-on-quarter (QoQ) with a negative constant currency (CC) impact of 115 bps (3.2 per cent CC growth). On the margin front, we expect a largely downward trend despite rupee depreciation, led by wage hikes. We expect TCS to report margin declines of 140 bps QoQ. Operational efficiency and currency to offset wage hike impact to some extent.

Edelweiss Research

Expect revenue growth of 4.1 per cent QoQ in CC terms, driven by ramp-ups in major deal-wins last year. However, we foresee 100bps cross currency impact, bringing down dollar revenue growth to 3.1 per cent. EBITDA margin is expected to decline 50 bps QoQ on account of visa costs (40 bps) and wage hikes (180bps), offset by rupee depreciation and operational efficiencies. Commentary on spends by BFSI and Retail clients, growth in digital, outsourcing levels in Europe are key monitorables.

HDFC Securities

Revenue in dollar terms is estimated at $5,063 million, up 1.8/10.3 per cent QoQ/YoY respectively, based on 3 per cent growth QoQ in constant currency terms and a negative 120 bps cross currency impact. Rupee revenue is estimated at Rs 339.25 billion, up 5.8/14.7 per cent QoQ/YoY respectively. EBIT margin is estimated to decline 40bps QoQ to 25 per cent (target band of 26 to 28 per cent) impacted by wage increase (-200 bps margin impact) offset by rupee depreciation and efficiency gains. Profit after tax (PAT) is estimated at Rs 70.31 billion, up 1.5/18.2 per cent QoQ/YoY respectively. Key monitorables include margin outlook with increased onsite investments and commentary on deal wins and deal pipeline

Motilal Oswal Securities

TCS is expected to continue its outlook of gradually accelerating revenue growth. However, keenly watched will be the commentary on BFSI recovery, green shoots of which were cited in the previous quarter. TCS should also retain its outlook for EBIT margin in the range of 26-28 per cent, it says.

It sees a 19.6 per cent YoY and 3 per cent QoQ rise in its net profit at Rs 71.08 billion. Sales may rise 14.7 per cent YoY and 5.8 per cent QoQ at Rs 339.27 billion.

Emkay Global 

Appreciation of dollar against all major currencies in Q1FY19 will lead to significant headwinds to dollar revenues. Key monitorables for Q1FY19 include revisions to FY19 revenue growth and margin guidance, change to capital allocation policies and commentary on industrialisation of Digital. Peg net profit at Rs 69 billion. Sales may rise 16 per cent YoY and 7 per cent QoQ at Rs 342 billion.

IDBI Capital

Watch out for: 1) Demand outlook for CY18 budgets, especially for BFS, 2) Ramp-up of large-deals; 3) Outlook on EBIT margin amid INR depreciation, 4) Large deal wins and growth in large clients; and 5) Growth in Digital services and commentary on ramp-up of recent deals.