TCS Q3 results preview: $7-10 billion deal wins, 12-17% rise in profit, margin expansion, attrition & more

Tata Consultancy Services (TCS), India’s largest software exporter, is ready to report its quarterly earnings later today. If Accenture’s recent quarterly earnings were any cue, the IT major may report strong set of numbers. But investors would rather be focusing on demand trends, especially in verticals such as BFSI, retail, manufacturing and communications, in the backdrop of slowing global economy.

Brokerages largely expect deal wins in the $7-10 billion range for TCS and while they see margin expanding sequentially for the quarter. Any re-prioritising of spends by clients due to cost initiatives will be keenly watched.

Deal wins

TCS reported a total contract value (TCV) of $8.1 billion in the September quarter, which included only one large deal. Nirmal Bang believes the deal wins were flattish or lower in the December quarter on account of delays seen in decision making, especially on longer term deals.

Motilal Oswal Securities expects TCS’ deal pipeline remains strong as it projects deal TCV to be within the $7-8 billion range. Kotak Institutional Equities, which is expecting steady but unexciting TCV numbers from IT companies, sees TCS to report TCV of $$9-10 billion.

“Unless we see a good spike in order inflow in 2HFY23, we believe that total order inflow for FY23 will at best be flat YoY and very likely be lower,” Nirmal Bang said.

Bottom line

Reliance Securities expect TCS to report 15.3 per cent year-on-year (YoY) rise in net profit at Rs 11,261 crore compared with Rs 9,769 crore in the year-ago quarter. Motilal Oswal Securities pegs TCS’ Q3 profit at Rs 11,220 crore, up 14.4 per cent. Dolat Capital Market sees profit at Rs 11,012 crore, up 12.7 per cent YoY. Nuvama pegs profit at Rs 11,377 crore, up 16.5 per cent YoY or 9.1 per cent QoQ.

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Top line

Reliance Securities sees revenues rising 17.6 per cent YoY to 57,496 crore from Rs 48,885 crore in the year-ago quarter. Emkay Global sees revenue rising 16.6 per cent YoY to Rs 56,993 crore.

Dollar, CC revenues

In constant currency terms, TCS is expected to report a 1.9 per cent sequential revenue growth in CC terms compared with a likely 1.2 per cent growth for Infosys, 3 per cent growth for HCL Tech and 1.2 per cent growth for Wipro, as per Nuvama estimates. Reliance Securities sees CC revenue growth at at 1.6 per cent.             

Nuvama sees Dollar revenue growth at 1.6 per cent QoQ compared with 1 per cent each for Infosys and Wipro and 2.7 per cent for HCL Tech. Reliance Securities sees dollar revenues for TCS rising 1.8 per cent QoQ (7.3 per cent YoY) to $7,003 million ($7 billion).

Margins

In terms of margins, the TCS management had earlier indicated the focus was on improving margins.  The benefits of lower sub-contracts and higher billable freshers, and rupee depreciation, should aid margin sequentially, Investec said.

Investec expects Ebit margin to improve to 24.8 per cent against 24 per cent in September quarter and 25.6 per cent in the year-ago quarter. ICICIdirect sees margin for the IT firm coming in at 24.2 per cent, due to easing of supply side pressure.

What to watch out for

Kotak Institutional Equities has list out seven factors that investors need to follow:

1) 2023 budget closure, rate of spending increase and decline and priorities

2) Decision making criteria of the client to retain, axe vendors given that the emphasis on cost take-out has increased

3) Health of impacted verticals and geographies, especially hi-tech, retail and Europe

4) Deal pipeline, composition of deals; how it has changed; pace of decision making

5) How the current slowdown and potentially even the recession differ from the past

6) Outcome from push by companies to get rate increases

7) attrition rate, especially onsite

8) Levers to increase margin back to the 26-28 per cent range.

Source