TCS seen rising on major deals
Tata Consultancy Services, India's largest IT services firm, is expected to see its revenue grow 2-4 per cent in the second quarter to September on more deals in North America and the UK and improved spending by banking clients, say analysts.
The Tata group company would on Thursday kick off the quarterly results for the Indian IT services sector, which is looking to see higher growth returning on the back of an improved economic scenario in its main markets such as the US and Europe.
At the same time, these firms are battling technology shifts that have made global firms cut their budgets on traditional IT services, while increasing them for newer services such as digital and cloud.
Wipro would declare its second-quarter results on October 17 and Infosys, which has seen its co-founder Nandan Nilekani back at the helm, would announce its numbers on October 25.
Brokerage Edelweiss has estimated a conservative 2.4 per cent revenue growth over the last quarter to ~29,977 crore and an Ebitda of ~7,943 crore. Absence of visa costs and wage hikes are expected to impact the Ebitda while BFSI and retail would continue to be monitored.
“With Accenture reporting a robust 19.6 per cent year-onyear jump in new bookings in outsourcing contracts, the outlook for IT appears to be improving. While the return of spending in the BFSI and retail segments will be key revenue driver, we believe companies will continue to report robust growth in digital services, with a higher number of digital transformation deals,” analysts Sandip Agarwal and Pranav Kshatriya wrote in a note on October 6.
Demand for offshore IT, cloud analytics and security products from continental Europe would remain strong, according to Bloomberg.
IDBI has forecast constant currency growth of 2 per cent, quarter on quarter, with crosscurrency tailwinds having an impact of 140 bps. Growth in digital services and large deal wins through the quarter have put revenue estimates for TCS at ~30,534 crore, which is 3.2 per cent growth over the last quarter. Ebit margins would jump to 25.1 per cent, up from 23.4 per cent last quarter but lower than 26 per cent last year.
Lloyds Banking Group’s pension project that had awarded TCS a deal for servicing 4 million policies was significant as it was the first major UK-based deal since “Brexit”, noted Elara Capital. The report has pegged revenue estimates at ~30,668 crore and profit estimates at ~6,095 crore, falling 7.5 per cent over the last year. Ebitda is estimated to jump almost 8 per cent to ~8,016 crore.
“We expect the commentary to be good, given the recent large deal win with Scottish Widows, a part of Lloyds Banking Group. Since TCS already absorbed the wage hike, we expect Ebit margin improvement of 110 bps over Q2, including cross-currency gains. However, hedging gains will be lower compared to the last quarter, given the higher end point for rupee against the dollar. So, we expect net income to be up only 2.8 per cent, quarter-on-quarter, despite the Ebit increasing by 8.6 per cent, quarter-on-quarter,” said Ravi Menon, IT and telecom analyst at Elara Capital. Cross-currency gains of 90 bps would help TCS report 3.9 per cent quarter-onquarter growth in dollar terms, he added.Analysts say while the sector sees improved growth, the performance of individual companies could differ.
“There can be a lot of variation in performance so it will not be fair to expect the same results from different companies in the sector. However, margins between 24.5 per cent and 25.5 per cent will be expected, while BFSI and retail will remain sectors to watch out for in terms of performance,” said Harit Shah, research analyst at Reliance Securities. Constant currency growth in this traditionally strong quarter would be keenly watched by the industry, he added.