Five key things to watch out from TCS Q4 results

Estimates of key brokerage firms say revenue growth should range between 4.4-5.4% year-on-year basis

India’s largest information technology (IT) services firm Tata Consultancy Services is likely to report “sustained” growth numbers for the fourth quarter of 2016 financial year continuing the momentum from Q3. After second largest software exporter Infosys’ forecast for a sluggish growth in FY18 at 6.5 to 8.5 per cent, TCS commentary on business will indicate how the Indian IT industry sail through challenges such as protectionism, stricter visa norms in the US and automation.

TCS surprised the streets in October-December quarter with nearly 11 per cent growth in net profit to Rs 6,778 crore on a year-on-year basis and 2.9 per cent growth on a sequential basis. Revenues were up by 8.7 per cent at Rs 29,735 crore year-on-year and grew 1.5 per cent quarter-on-quarter.

Estimates of key brokerage firms suggest revenue growth of the company should range between 4.4 and 5.4 per cent year-on-year basis, while it is expected to grow between 1.5 to 2 per cent on sequential basis in Q4 in constant currency terms.  

The industry will keenly watch the fourth quarter results of the company as Tata Sons Chairman N Chandrasekaran, in his previous avatar as chief executive officer and managing director at TCS, suggested revival of growth in third and fourth quarters after an “unusual” Q2.  At a time when the large IT service providers are seeing a decline in traditional businesses and transition to digital technologies are not fast enough, TCS reported nearly 30 per cent growth in its technology business.

With the change of guard at the help TCS as Rajesh Gopinathan delivers his first quarterly results as the chief executive office.

Here are five things to look for:

How has the company dealt with strong Rupee?  

During the fourth quarter, Rupee appreciated significantly against the US dollar as the values closed at 65. Analysts say this will have an impact on the operating margin of IT services companies as they get paid by clients in US dollar. While a strong Rupee may bring down operating margin by 20-30 basis for the fourth quarter of FY17, if this sustains for long the earning estimates will be further moderated, says  Gautam Duggad, Head of Research at the brokerage firm, Motilal Oswal. Management commentary on measures to remain stable despite currency headwinds will be important to note.

Global headwinds

For Indian services companies, the geopolitical environment has not yet revived. As they do not see the political stability with lack of clarity after Brexit in Europe and signs of stricter legislation in the US, customers of these IT firms are holding back in decision making. For TCS, the commentary on banking and financial services (BFSI) and retail segments will be important.

US President Donald Trump is expected to sign on Tuesday a presidential order against H1B visas, a move that could hurt Indian IT services firms. This comes even as fresh applications for the coveted visas dropped a four-year low, according to the USCIS.  

Digital business growth

TCS is one of the few Indian IT services firms to show separate growth for digital technology business. With the rapid transformation from traditional technology services to digital technologies such as artificial intelligence, cloud; the company’s growth numbers for digital business are crucial as such services from 16.8 per cent of top line currently, says Madhu Babu, IT analyst at equity research firm Prabhudas Lilladher. Analysts say the real digital transformation should happen faster as Indian firms digital business stand below 20 per cent on an average.

New leader at helm  

From the first quarter of this fiscal, the company will be led by new chief executive Gopinathan, who was elevated from within and earlier served as the chief financial officer. Under his leadership, one should keenly watch the company’s growth guidance for FY18, which Motilal Oswal estimates to at 9.5 per cent in constant currency terms. It will also be important to her his commentary on measures to deal with visa restrictions and the overall global business environment.

Client spending improvement 

The company during Q3 results announced improvements in client spending over the next couple of years across retail and BFSi segments once the US administration stabilises. Look out for its commentary on client spending. “Key thing to watch out for is client spending trends in key verticals such as financial services and retail,” says equity research firm Emkay.