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TCS Q3 preview: Experts say cross currency headwinds may hit revenue growth

Rajesh Gopinathan, Chief Executive Officer & MD, TCS
Tata Consultancy Services (TCS) is slated to announce its third quarter results of the current financial year 2018-19 (Q3FY19) on Thursday. Third quarter is a seasonally soft three-month period, with fewer working days due to the holiday season, as well as furloughs in select verticals. Due to this, most brokerages expect Tier-1 IT companies to report tepid constant currency (CC) revenue growth of 1.8-3.2 per cent on quarter-on-quarter (QoQ) basis.

This apart, depreciation of major global currencies against the dollar is likely to hurt revenue growth by 40–70 basis points (bps) QoQ. However, rupee's depreciation against the greenback is expected to lift margins by 40–60 bps QoQ, brokerages say.

TCS had reported a 22.6 per cent year-on-year (YoY) jump in its consolidated net profit at Rs 7,901 crore during July-September 2018 quarter, buoyed by strong demand for digital services. The Rajesh Gopinathan-led company saw a revenue growth of 20.7 per cent at Rs 36,854 crore in the September quarter, up from Rs 30,541 crore a year ago. Its earning per share (EPS) for the quarter was at Rs 20.66.

For October-December period of FY18-19, the IT major is expected to post revenue growth in CC terms between 1.5 per cent-2.2 per cent QoQ. "Considering seasonal weakness on account of furloughs, we still expect CC revenue growth of 2.2 per cent QoQ on account of strong demand environment. However, US dollar growth to be restricted to 1.6 per cent on account of cross currency headwinds," say analysts at Edelweiss Securities in earnings preview note.

Centrum Broking expects US dollar revenues to grow by 1 per cent QoQ and sees cross currency to be a headwind of 80 bps QoQ.

Motilal Oswal Financial Services sees sales (revenues) in rupee terms to grow 2.9 per cent QoQ and 22.7 per cent YoY at Rs 37,914 crore while EBITDA is seen growing 3.4 per cent QoQ and 28.2 per cent YoY at Rs 10,628.9 crore. PAT (profit after tax) or net profit is expected to come in at Rs 7,892.3 crore, down 0.1 per cent QoQ and 20.8 per cent rise YoY.

Analysts at IDBI Capital forecast CC revenue growth of 1.5 per cent QoQ led by continuation of ramp-up of large deals offsetting the impact of seasonal weakness. "We forecast cross-currency impact of 70 bps," they say.

According to Edelweiss Securities, revenue in rupee terms will rise 3.6 per cent QoQ and 23.5 per cent YoY. EBITDA margins are expected to rise 100 bps QoQ on rupee depreciation (50bps) and efficiencies (50bps). PAT will grow at 6.7 per cent QoQ and 29.1 per cent YoY basis.

Key things that would be keenly watched out for include:

- Commentary on demand outlook for CY19 given the global macro uncertainties;

- Ramp-up of large-deals;

- Outlook on EBIT margin amid rupee volatility;

- Large deal wins and growth in large clients; and

- Commentary on spends by BFSI and Retail clients, growth in digital and outsourcing in Europe

Shares of TCS have risen 40 per cent in the calendar year 2018 (CY18) whereas the S&P BSE IT index jumped 25 per cent, mainly owing to depreciation in the rupee. In comparison, the S&P BSE Sensex rose 6 per during the same period. However, since November 2018, the BSE IT index has given-up part of 2018 gains. This has been mainly driven by rupee appreciation and concerns over slower growth in the US. As a result, in the last three months (since November 1), the S&P BSE IT index has risen merely 1.63 per cent whereas the S&P BSE Sensex has gained 4.49 per cent (as of Tuesday's close), ACE equity data show.

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