TCS Q2 results: Largest IT exporter may see deceleration in revenue growth

Analysts expect a deceleration in the revenue growth for TCS on a year-on-year basis.

BCCL
HDFC Securities expects TCS to post 3.2 per cent revenue growth in constant currency terms and cross-currency headwinds of 72 bps.
Mumbai: India Inc’s September quarter earnings season is set to kick off with the quarterly numbers of software exporter Tata Consultancy Services (TCS) on October 10.

Analysts expect a deceleration in the revenue growth for TCS on a year-on-year (YoY) basis, in what is generally considered a seasonally strong quarter.

However, an uncertain global environment could weigh on revenue growth. Analysts expect 2.6-3.2 per cent quarter-on-quarter (QoQ) revenue growth for TCS in constant currency terms, while year-on-year (YoY) growth in percentage terms may be contained in single digits.


“Q2 is a seasonally strong quarter, but the YoY revenue momentum will be muted for most IT companies and deal closures will be muted due to an uncertain global environment,” brokerage Prabhudas Lilladher said in a note.

“We expect the cautious outlook on financial services to continue in Q2 of FY20E,” the company said.

It expects TCS’ revenue growth and outlook to be challenged by headwinds coming from European BFSI (banking, financial services and insurance) vertical.
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The brokerage pointed out that most global currencies depreciated against the US dollar during the quarter, which will imply cross-currency headwinds of 30-70 basis points (bps) for IT companies under its coverage.

Jefferies expects 2.7 per cent QoQ constant currency growth (1.8 per cent growth in dollar terms) and around 100bps QoQ expansion in Ebit (earnings before interest and taxes) margin to 25.1 per cent.

However, this would still imply a YoY deceleration in revenue growth in constant currency terms to single digit (9.1 per cent) after four quarters, it said.

“While TCS does not provide explicit growth guidance, deal TCV, which has averaged at $6 billion over past three quarters, and management commentary would be key to determining prospects for H2, including the possibility of its return to double-digit growth,” Jefferies analysts said.
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HDFC Securities expects TCS to post 3.2 per cent revenue growth in constant currency terms and cross-currency headwinds of 72 bps, and said the moderation in revenue growth could be due to client-specific issues in the BFSI vertical in Europe.

Kotak Institutional Equities expects 2.6 per cent revenue growth in constant currency terms for TCS and cross-currency headwind of 75 bps on a QoQ basis.
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It said the high base of Q2FY19 is likely result in a deceleration in YoY constant currency growth to single digit.

“We expect some moderation in growth from the financial services vertical. Client-specific challenges can also impact the retail vertical. We expect healthy revenue growth for other verticals,” Kotak said in a note.

It expects Ebit margin to expand 150 bps QoQ but decline 80 bps YoY. “We expect a sequential increase on account of a marginal depreciation in the rupee, absorption of wage revisions and higher billing days,” the brokerage said.

It attributes the YoY decline in margins largely to increase in the US cost structure.

Net profit growth appears modest due to completion of buyback of equity. EPS growth stands at 8.4 per cent YoY.
“We expect investor focus on demand from the financial services vertical, especially the capital markets segment, order bookings and whether it will be sufficient to hit double-digit growth, impact of talent crunch in the US on margins and effort to reduce subcontracting costs and progress in nascent but the fast-growing products and platforms business,” Kotak said in the note.

TCS shares declined 8.34 per cent in the September quarter, underperforming the rally seen in its peers. In the same period, Infosys and HCL Technologies rose 8 per cent and 2.37 per cent, respectively.

On a year-to-date basis, while TCS rose 8 per cent, while Infosys and HCL Technologies advanced 19 per cent and 12 per cent, respectively.
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