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TCS Q1FY23 Earnings Snapshot: Earnings, Revenue May Increase YTD, EBIT Margin Expected to Fall; here’s what to watch

India’s largest IT company Tata Consultancy Services (TCS) will kick off the earnings season with its FY23 first quarter results expected on Friday, July 8, 2022. Research and brokerage firms estimate that in the first quarter of the current fiscal year, segment revenue could grow 3.6-4% CC sequentially as of 1QFY23, driven by continued demand momentum, solid backlog growth in Q1, but impacted by a cross impact of 200 pb on currencies. EBIT margins may contract sequentially due to wage increases, visa fees and supply-side pressures, partially offset by INR depreciation. Hiring and attrition may begin to subside, while travel and sales and marketing expenses may increase.

Earnings growth: Motilal Oswal Financial Services expects Tata Consultancy Services to deliver 11.2% year-on-year PAT growth in adjusted net profit to Rs 10,050 crore. Prabhudas Lilladher expects adjusted profit to rise 10.7% YoY to Rs 9,968 crore

Revenue increase: JM Financial Services is based on c/c growth of 3.7% quarter-over-quarter with 150 basis point headwinds across currencies. Prabhudas Lilladher expects healthy revenue growth of 4% sequentially CC (constant currency) given the ramp-up of strong backlog won in the prior quarter. He expected 2% weaker growth sequentially in USD due to 200bp cross-currency headwinds. Motilal Oswal Financial Services analysts forecast that in terms of CC, growth should continue to remain in a narrow band, but the reported growth will be affected by cross-currency movements. IIFL Securities expects sequential revenue growth of 3.6% cc in the first quarter, driven by record backlog and continued momentum in demand for core transformation. PhilipCapital expects CC revenue growth of 3.7% QoQ (2.3% YoY in USD) driven by strong momentum from digital transformation programs. Expect growth to be broad-based across all verticals.

EBIT margins: JM Financial Services expects EBIT margins to decline to 23.4% QoQ, impacted by salary increases and the recovery of travel/facility costs. Prabhudas Lilladher analysts forecast a 90 to 100 basis point quarter-over-quarter decline in EBIT margin due to wage increases, higher retention costs and increased travel expenses. Motilal Oswal believes that the 1QFY23 margin will be affected by rising wages and continued supply-side pressures. IIFL Securities expects a sequential decline in margins of 170 basis points, due to the impact of salary increases, visa fees and increased travel costs. Those at PhilipCapital expect margins to decline 140 basis points quarter-on-quarter due to wage increases, travel costs and supply-side pressures, which will be offset by currency depreciation. USD/INR.

What to pay attention to?

JM Financial noted that the key things to watch would be the outlook on customer spending trends in BFSI and retail, margin performance and the outlook, especially given the likely resumption of pressures from the side of travel and supply and price outlook. Prabhudas Lilladher expects investors to focus on whether there is a change in the nature of demand, such as greater focus on costs, due to the weak environment macro; big and mega presence in the deal pipeline; hiring, attrition and on-site wage inflation trends and its impact on future margins. Motilal Oswal said the deals reached and the impact of macroeconomic weakness on growth will be key things to watch. Analysts at IIFL Securities say the main comments to watch would be deal-closing dynamics and the nature of the deals; any early signs of the current macro environment impacting the demand environment or decision-making; supply-side challenges; and FY23 growth and margin outlook.

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