technology

TCS Q3 margins may rise on rupee fall, efficiency


Tata Consultancy Services (TCS) is expected to report a 12.4% growth in profit and a 16.7% growth in revenue for the third quarter, according to an ET poll of analysts.

TCS will report results for the October-December period on Monday.

In a quarter of higher furloughs (holidays), India’s largest IT services company by revenue is expected to report a margin improvement of 40 basis points sequentially to about 24.4% led by higher efficiency, lower attrition and rupee depreciation.

“This quarter is expected to be hit by furloughs, (which will be) higher than the last couple of years. However, margins are expected to improve QoQ due to easing of supply side pressure,” ICICI Securities said in a report.

TCS chief executive
Rajesh Gopinathan told ET last month that calendar year 2023 would be “the year to repair margins.”

Margins, he said, would improve in the coming quarters but not by leaps and bounds as the US economy is in good shape.

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“So, like attrition peaked, from a year perspective, we should see an improving trend in margins. The year 2023 is going to be kind of a consolidation year on the demand side, supply side and on the overall financial performance,” he had said.
Indian IT companies overall are
expected to report modest numbers for the quarter ended December 31, on tightening tech spending by clients due to macroeconomic and geopolitical concerns.

The third quarter is a seasonally weak one for IT firms due to the lower number of working days.

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ICRA said in a recent research report that since the Indian IT services industry generates close to 60-65% of its revenue from the US market and 20-25% from Europe, it remains susceptible to macroeconomic uncertainties and adverse regulatory changes in these key operating markets.

The brokerage expects a few pockets of weakness for TCS across the banking, financial services and insurance (BFSI) space, hi-tech and manufacturing due to macro concerns as well as energy constraints in Europe. Deal momentum is expected to continue while a mix of deals would be skewed towards cost-take out programs.

“We expect TCS to report CC (constant currency) QoQ growth of 1.5% for the quarter to be aided by continued deal execution; albeit growth will be lower compared to strong H1 on lesser working days,” the brokerage said.

Elara Capital expects TCS to report good growth in the life-sciences and travel verticals.

TCS is working with five large pharma companies to optimize their supply chain, it noted.

“Expect stronger growth from APAC and LATAM due to stronger customer additions in such geographies in Q2,” the brokerage said in a report.

Deal total contract value (TCV) for the quarter is expected to remain stable.

TCS reported $8.1 billion in TCV during the previous quarter, including major ones with clients like Sainsbury, TAP Air Portugal, Randstad, Rail Delivery Group and Outokumpu.

The Street will be looking for commentary on deal pricing improvement and client IT budgets for the year.

Analysts also expect margin growth of 30-40 basis points, easing of supply-side challenges and improved utilisation as well as productivity levers.

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They expect positive commentary on attrition, which peaked at 21.5% last quarter. The rate of attrition is expected to remain stable on an annualised basis but to trend downwards on a quarterly basis.

Net hiring, which stood at 9,840 last quarter, is
expected to trend significantly lower as technology companies have pulled back on hiring mandates due to the macroeconomic uncertainties.

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