TCS Q2 nos today: New deal wins, EBIT margin outlook key issues to watch

IT bellwether Tata Consultancy Services (TCS) is slated to announce its September quarter earnings today. Majority of the analysts expect IT companies to report healthy numbers led by the ramp-up of recent large deal wins, improving the macro environment, and strong seasonality.

TCS posted better-than-expected results for the June quarter of FY19. The IT services firm posted 23.5 per cent rise in its consolidated net profit at Rs 73.62 billion, while in sequential terms, the net profit grew 6.3 per cent.

The firm is expected to continue with its good performance in the second quarter of FY19 as well. Here's what leading brokerages expect from the June quarter earnings –

Motilal Oswal Securities
On the back of $1.6 billion deal win in BFSI alone, the brokerage expects high growth momentum from the largest revenue contributing vertical. Execution of recent deal wins and seasonal strength would ensure maintenance of revenue growth trends. It expects 4 per cent QoQ CC growth in 2QFY19 (2.8 per cent QoQ in US dollar terms). PAT (Profit after tax) estimate stands at Rs 77.9 billion.

  1. New deal wins and outlook on continual of traction seen so far;
  2. Traction in new initiatives (Digital/automation/solutions);
  3. Margin expectations for the next year

The brokerage expects TCS to deliver healthy revenue growth led by the ramp-up of recent large deals won during the last couple of quarters, with CC (constant currency) revenue growth of 3.9 per cent QoQ. The cross-currency headwinds to be 110 bps. Net profit is expected to grow 23.9 per cent YoY and 8.8 per cent on QoQ basis at Rs 79.87 billion. Sales are expected to grow 19.8 per cent YoY and 6.8 per cent QoQ at Rs 365.89 billion. Operating profit margin will come in at 27.6 per cent, up 92 bps (YoY) and 117 bps (QoQ). It expects the company to deliver best-in-class organic CC (constant currency) revenue growth of 3.9 per cent QoQ, led by broad-based performance across verticals and continued growth momentum in the digital business. EBITDA margin is expected to improve (120 BPS QoQ) on account of the absence of wage hike, rupee tailwind and productivity improvements. It has a buy rating on the stock with the target price of Rs 2,400.

Emkay Global Securities

It has built in a 3.8 per cent QoQ constant currency (CC) revenue growth with 150 bps QoQ cross currency headwinds leading to a 2.3 per cent growth in US dollar terms. Reported growth is expected to be superior by 330 bps on sharp rupee depreciation during the quarter. “We expect gains of about 140 bps on operating margins on a sequential basis due to wage/visa impact normalization and rupee depreciation,” says the brokerage firm.

 IDFC Securities

We expect TCS to post CC growth of 3.5 per cent QoQ. Execution of recent deal wins and seasonal strength would ensure maintenance of revenue growth trends, in our view. A key focus will be on new deal wins and outlook on continual of traction seen so far and also on commentary on client budgets, Diligenta, and outlook of BFSI and retail.

Kotak Securities

All verticals will report healthy growth. Expect EBIT margin expansion of 150 bps led by 105 bps from Rupee depreciation, absorption of wage revisions and operational efficiencies. It sees the net profit to rise 25 per cent, led by acceleration in growth and currency tailwinds. The brokerage house expects investor focus on -
  1. demand outlook for the rest of the year;
  2. pipeline of large deals,
  3. EBIT margin outlook and reinvestment plans of the recent currency windfall; and
  4. pace and nature of digital deals won.

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