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- TCS is expected to post a flat or a minor decline in constant currency revenues for Q3 on sequential basis.
- It’s expected to post a slight improvement in EBIT margins due to operating leverage and cost efficiencies.
- The street will watch out for deal commentary, deal conversion, client decision making and pricing trends.
IT bellwether, TCS, will kick off the Q3FY24 earnings season on Thursday evening and is expected to declare flat revenue growth as compared to the last quarter. Like most of its peers, its revenues for the quarter would be impacted furloughs, lower discretionary spends and delay in deal ramp up.
It’s not all dark, however. Amongst the top three IT majors, TCS is the only one expected to finish off the third quarter with a green topline. Its peers – Infosys and Wipro both of which are expected to report decline in revenue during the quarter.
“Expect TCS to report flat revenue growth, backed strong order inflow of the last 3 quarters. The headwind will likely be continued compression in the existing book of business (albeit much less than in earlier quarters). In our view, it is also likely to face higher than normal furloughs due to its large exposure to the BFSI sector,” said a report Nirmal Bang Institutional Equities.
In spite of large deal ramp-ups including BSNL deal, it’s expected to see offsets from furloughs and ongoing revenue leakage. The entire sector is expected to see anywhere between slight revenue growth to decline in Q3, as it’s the season of high furloughs.
Due to the slow conversion of deals to revenues and clients’ tight fisted nature towards discretionary spending are to keep the furlough effect even deeper this fiscal year.
TCS Q3 earnings forecast (QoQ)
| Particulars | IDBI Capital | Nirmal Bang | Motilal Oswal |
| CC Revenues | 0% | -0.1% | 0.4% |
| Net profit | -1.3% | 3.1% | 2.3% |
Source: Brokerage reports
What will the street watch out for?
The company is expected to see cross-currency headwinds to the tune of 75 basis points during the quarter, but the street expects few surprises from the company.
It’s also expected to see a strong deal pipeline in the December ending quarter, as seen in the first half of the year. “The deal pipeline should remain resilient, especially in the UK regions, while the US and Europe continue to stay on a weaker trajectory,” said Motilal Oswal.
Its margins and profitability are also much safer than its peers, as did not go for year-end salary hikes like Infosys. It’s expected to post a slight improvement in margins during the quarter.
Jefferies says that its earnings before interest and tax (EBIT) margins are likely to improve 28bps quarter-on-quarter largely due to operating leverage, cost efficiencies and net currency benefits. We expect order intake to remain healthy
“With subcon costs already at multi-quarter lows and in line with pre-pandemic times (6.8-7.0%), margins will improve on the back of pyramid restructuring, higher offshoring, higher utilization and driving efficiencies in discretionary expenses,” said Nirmal Bang.
What will the street watch out for?
The street will keenly watch out for demand commentary from the company management, as it has a high exposure to the stressed BFSI segment. Most brokerages expect its deal wins to remain range-bound due to slower decision making, without any more mega-deal announcements.
“Would watch for strategy of CEO to drive growth; TCV (total contract value) of deal wins; deal pipeline conversion trend; hiring and offshoring; commentary on long term digital trends; trends in generative AI,” said a report IDBI Capital.
Analysts are also hoping to see if they will give any indications on macroeconomic situation, client decision making and pricing trends, along with outlook on 2024 IT budgets.