Earnings preview: Top things Dalal Street will look for in TCS Q3 results

IT major Tata Consultancy Services (TCS) will be the first IT company to announce its third-quarter earnings on Thursday. The stock was trading flat in intra-day deals today after rallying nearly 4% on Wednesday ahead of numbers.
 
As it is seasonally a weak quarter for IT companies due to implications of US tax reform and potential changes to visa rules in US, analysts expect revenue growth to be muted.
 
TCS reported a 2.1% decline in its second-quarter profit to Rs 64.46 billion from Rs 65.86 billion in the same period last year due to higher costs and sluggishness in the BFSI and retail businesses. Revenue rose 4.3% to Rs 305.41 billion from Rs 292.84 billion last year.

 

Revenue
 
Revenue is expected to be at Rs 312.9 billion, up 2.4% (QoQ) and 2% (YoY), according to Reliance Securities, while Motilal Oswal Securities suggests sales to be up 4.4% (YoY) at Rs 310.28 billion
 
Net Profit
 
According to Motilal Oswal Securities, net profit for the IT major will remain muted, estimated to be at Rs 63.93 billion, down 5.7% (YoY) and 0.8 (QoQ) respectively led by lower other income and marginally higher tax outgo.
 
Revenue Growth
 
Revenue growth for TCS has been dragged lower by the softness seen in BFS and Retail. Although it has been seeing a pick-up in Insurance and emerging verticals, pressure points have been restricting growth. MOSL expects continuation of these factors and seasonal weakness leading to 1.1% QoQ dollar revenue growth.

 
Kotak Securities, on the other hand, expects constant currency (c/c) revenue growth of 1.4% and negligible cross currency impact.
 
Dollar Revenue
 
Dollar revenue is expected to grow by 2% QoQ, largely in-line with CC revenue growth, according to the brokerage Reliance Securities. They also added that operational efficiency will aid the margin expansion.
 
EBIT Margin
 
Reliance Securities estimates EBIT Margin to be at 25.4% in the third quarter as compared to 25.1% in the previous quarter. As for Motilal Oswal, their EBIT margin estimate stands at 24.9% (-20bp QoQ), coming in below the lower end of the guided range of 26-28% for the fourth straight quarter.

 
Key issues to watch out for
 
Investors will look out for outlook on BFS and retail, traction in new Digital initiatives (automation/solutions), margin expectations given the lower organic growth and impact of US tax reform.