TCS Q4 preview: Muted revenue growth likely, deal momentum may continue; result on 12 April

During December 2022 quarter, TCS garnered a net profit of ₹10,846 crore attributable to shareholders on a consolidated basis up by 11.02% YoY and 3.98% QoQ. The net margin stood at 18.6% for the quarter, whereas the operating margin stood at 24.5% contracting by 0.5% YoY.

On the other hand, TCS consolidated revenue from operations came in at ₹58,229 crore increasing by 19.11% YoY and 5.28% QoQ. In terms of constant currency, the revenue growth was at 13.5% YoY driven by business in North America and the UK. TCS’ order book stood at $7.8 billion as of December 31, 2022, versus $8.1 billion in 2QFY23.

What to expect in Q4?

In regards to TCS, ICICI Direct in its report believes that the Q4 is a seasonally weak quarter for the company due to fewer working days and some furlough impact in January.

The brokerage added, “We also cannot rule out some impact (minor) on TCS’ Q4 numbers on account of a surprise change at the top. We expect the company to report 1% CC revenue growth for the quarter. Growth is expected to be driven by continued deal momentum especially in cost take-out deals, cloud transformation and some benefits likely coming from vendor consolidation.”

Further, the brokerage expects TCS to post 100 bps cross-currency tailwinds due to GBP and EUR appreciation against US$. Hence, dollar revenues are expected to grow by 2% QoQ. However, it expects rupee revenues to increase 1.9% QoQ on account of stable rupee-dollar movement.

ICICI Direct believes that TCS will miss the target exit EBIT margin range of 25% as lower growth would be an additional headwind. Thereby, the brokerage has build in only 20 bps QoQ margin expansion ( vs. 50 bps implied margin expansion for target exit).

Also, the brokerage expects BFSI as a vertical and US as geography likely to see some growth moderation in the quarter.

Furthermore, Kotak Institutional Equities believes that TCS will likely lead Tier 1 IT on growth in 4QFY23. It forecast growth of 1.1% qoq and 11.2% yoy revenue growth in c/c. Growth will likely be led by spending on cloud and digital programs, cost take-outs, and wallet share/vendor consolidation gains. Exposure to impacted banking clients will not materially impact revenue growth in our view in the quarter.

Kotak in its note has further forecasted a 50 bps increase in EBIT margin on a sequential basis which will be driven by easing supply side pressures, rationalization of subcontractor usage, improved utilization, and operational efficiencies.

Kotal also expects strong deal wins of $10 bn+ for the quarter, assuming normal renewal component. However, the brokerage does not include TCV from mega deal with BSNL that is likely to be signed with TCS.

Additionally, TCS’ commentary on growth outlook will be keenly followed. TCS is expected to be a beneficiary of higher focus of enterprises on cost take-outs and core modernization.

In constant currency terms, Motilal Oswal expects , revenue growth is likely to be at ~0.9% QoQ, implying ~90bp of currency tailwind. While expect a 30bp improvement in operating margin, led by stabilizing supply and receding attrition.

Overall, ICICI Direct expects TCS to report a revenue of ₹59,362.9 crore up by 17.3% YoY and 1.9% QoQ. EBITDA is seen at ₹15,968.6 crore up by 15.3% YoY and 2.7% QoQ. While PAT is factored at ₹11,224.5 crore higher by 13.1% YoY and 3.5% QoQ respectively.

As per Kotak, key factors that investors can focus on TCS’ Q4 results are:

– CY2023E budget closure and pace of decision-making and ramp up of budgeted spends;

– pipeline of cost take-out and vendor consolidation decisions of clients and win-rates;

– changes to strategy, key bets and priorities of the organization under new CEO and continuity of current organizational structure that underwent a reorg under Rajesh;

– health of impacted verticals/geos especially hi-tech, retail and Europe;

– outlook of spending in BFS given recent events and exposure to impacted companies;

– how the current slowdown and potentially even recession differ from the past;

– whether attrition rate can reduce to pre-Covid levels and maintain pre-Covid level gap with peers and

– levers to increase margin back to 26-28% range.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.