Information technology (IT) major Tata Consultancy Services (TCS) will kick start the December quarter (Q3FY23) earnings announcements on January 9, Monday.
The company is likely to report a muted earnings growth in this seasonally weak quarter on the back of adverse global macros and US recession concerns, however, weakness in the rupee, the decline in attrition rate and strong deal wins are likely to aid the firm's profit margins in Q3.
Overall, the IT services sector is expected to report moderate growth in Q3FY23, primarily on account of the seasonally weak quarter and a slowdown in growth momentum led by uncertainties in the US and UK. However, IT spending in North America and Europe has continued to be relatively strong owing to the demand for digital and cloud transformations.
In an earnings preview report, brokerage house Axis Securities said that it believes the sector is likely to remain intact, at least for the quarter. However, at the current juncture, vertical commentary for the quarter stands critically important from major service providers, especially retail vertical, CPG, and BFSI. It expects midcap IT services companies to outperform Tier-I firms in terms of growth in Q3FY23.
The sector is likely to report revenue growth in the range of 0.5-4 percent QoQ in dollar terms. In rupee terms, Axis expects the sector to deliver QoQ revenue growth of 2.4 percent to 9.5 percent. Margins for the majority of companies are likely to be improved to the tune of 50–70 bps, largely due to the attrition levels slowing down and rupee depreciation, added the brokerage.
The Street will watch out for the impact on verticals due to the global macro situation, attrition trends, commentary on pricing, deal closures and deal pipeline, clients' tech budgets for 2023, vendor consolidation gains and outlook on EBIT margin.
TCS may post around 16-18 percent year-on-year (YoY) average revenue growth to around ₹57,500 crore in Q3FY23. Its net profit may rise 14-16 percent YoY to around ₹11,000 crore, as per experts.
Let's take a look at what different brokerages expect from TCS earnings.
Axis Securities: It expects TCS to report revenue growth of 3.6 percent QoQ. The company's operating margins are likely to remain flat owing to moderation in supply-side constraints, added the brokerage. Key attributes to watch out for are a) Deal TCV/pipeline, b) Pricing scenario, and c) Outlook on growth/margins/DSO days, it said.
Reliance Securities: The brokerage expects constant currency revenue growth of 1.6 percent QoQ. The company had earlier indicated headwinds in P&C insurance, mortgage, discretionary retailers in Europe and the UK, and potentially higher furloughs, it noted. It sees the EBIT margin to expanding 90 bps to 24.9 percent due to better utilization and scale. Meanwhile, on a YoY basis, the revenue in rupee terms is likely to jump 17 percent and 7 percent in dollar terms. Key things to watch for: 1) Deal commentary, 2) Outlook on EBIT margin and its sustainability 3) Pricing trends.
IDBI Capital: The brokerage expects 3 percent and 0.7 percent QoQ revenue growth in rupee and constant currency (CC) terms, respectively, with cross-currency tailwinds of 10 basis points (bps). Improved utilization and easing of supply-side challenges will aid margin improvement of 35 bps to 24.4 percent, it added.
Kotak Institutional Equities: Kotak sees TCS doing relatively better from the IT pack with firm revenue growth of 1.9 percent in CC terms led by vendor consolidation gains and strong deal wins. It also expects deal wins of $9 billion-plus for the quarter and a quarterly rise of 80 bps in EBIT margin.
ICICI Securities: As per the brokerage, this quarter is expected to be hit by furloughs, with furloughs expected to be higher than in the last couple of years. However, margins are expected to improve QoQ due to the easing of supply-side pressure, it said. ICICI Securities expects TCS to report CC QoQ growth of 1.5 percent for the quarter to be aided by continued deal execution albeit growth will be lower compared to strong H1 on lesser working days. A few pockets of BFSI, hi-tech, and manufacturing may witness weakness in the quarter due to macro concerns and energy constraints in the Europe region, it noted. It sees dollar revenue growth of 1.2 percent QoQ accounting for 30 bps cross currency headwinds. Rupee revenue is expected to grow 3.5 percent QoQ, aided by rupee depreciation. It expects margins to improve by 20 bps QoQ aided by easing of supply-side pressure, moderation of attrition and rupee depreciation. Deal momentum is expected to continue while a mix of deals would be skewed towards cost-takeout programs, added the brokerage.
Phillip Capital: It expects CC revenue growth of 1.6 QoQ (1.3 percent QoQ in USD). Growth moderation vs the previous quarter is due to seasonality. Margins are expected to continue increasing by +50bps QoQ on USD/INR depreciation, easing supply-side pressures and operational efficiencies offset by furloughs.
