TCS Q1 preview: Covid-19 pandemic to hit earnings; Q2 outlook eyed

Tata Consultancy Services (TCS), that is slated to announce its financial results on Thursday, July 9 will kick-off the April – June 2020 earnings season for information technology companies. It will be the first large-cap company to do so for the quarter that was marred by the Covid-19 induced national lockdown.

The company, according to analysts, may post up to 7 per cent decline in revenue in constant currency (CC) terms on a sequential basis owing to anticipated pressure in travel, transportation, energy, retail, and manufacturing segments due to the ongoing Covid-19 crisis. However, stable performance in financial and life science verticals may provide some cushion. Meanwhile, lower travel expenses, lower overhead costs owing to Work from Home (WFH) and rupee depreciation could be the tailwinds for the operating margins of the company, they say.

The Street, analysts believe, appears to be focusing on recovery path which is also visible in the strong rally in the sector. “We think the markets are still in a mood to overlook any misses given the continued macro uncertainty and even the lack of negatives could trigger positive share price reactions. We believe Q1 should be the low point for revenues, and expect a gradual recovery from Q2FY21 onwards,” wrote Diviya Nagarajan, an analyst at UBS tracking the sector in a July 7 note.

That said, insights into the forecast for the June – September 2020 period and the second half of the financial year 2020-21 (Q2/H2 FY21) are expected to be the key triggers for share price and market sentiment going ahead.

Here's a look at what leading brokerages expect from TCS' June 2020 quarter numbers.

UBS

The global research and brokerage firm expects revenue in rupee terms to decline 3.8 per cent quarter-on-quarter (QoQ) to Rs 38,414.5 crore, while earnings before interest and taxes (EBIT) margin is seen at 24.4 per cent – down 66 basis points (bps) QoQ. Net profit is estimated to drop 11.8 per cent QoQ to Rs 7,100.1 crore. In dollar terms, revenue is likely to decline 7.3 per cent QoQ and 8 per cent year-on-year (YoY), while constant currency revenue is likely to fall by 6.9 per cent QoQ and 6.8 per cent YoY.

 ICICI Securities

Analysts estimate dollar revenue decline of 5.5 per cent QoQ in constant currency terms to US$5,122.8 million, dented by a cross-currency headwind of 40 bps. In rupee terms, revenue is likely to slip 2.8 per cent QoQ to Rs 38,830.9 crore. On YoY basis, however, the numbers are expected to rise 1.7 per cent. Earnings before interest, taxes, depreciation, and amortisation (EBITDA) is seen at Rs 10,562 crore, up 5.2 per cent YoY, and down 3.8 per cent QoQ. Profit after tax (PAT), or net profit, is expected to come in at Rs 7,846.7 crore, down 3.5 per cent YoY and 2.5 per cent QoQ. Revival in IT spending, changes in delivery model, commentary on the deal pipeline, the trend across verticals, and key long term trends will be key monitorables.

Emkay Global

The brokerage has built-in a 5 per cent QOQ revenue fall in US dollar terms to US$ 5,173 million with nearly 50bps cross-currency headwinds. EBIT margin decline is expected to be limited to 80bps QoQ at 26.7 per cent on account of tight cost optimisation (freeze on discretionary spending, hiring, etc.), lower travel costs, subcontracting expenses and currency depreciation despite revenue drop. On YoY basis, the EBIT margin is expected to rise 40 bps.

Net sales (revenue) is estimated at Rs 39,265.4 crore, down 1.7 per cent QoQ and up 2.9 per cent YoY. EBITDA is seen at Rs 10,480.7 crore, up 4.4 per cent YoY and down 4.5 per cent on a sequential basis. Net profit is expected to fall 4.5 per cent YoY and 3.6 per cent QoQ to Rs 7,761.1 crore.

Demand trends in key verticals like banking, financial services and insurance (BFSI), retail and manufacturing (R&M), and outlook on pricing and possible client demand for lower rate cards around WFH delivery are some of the key monitorables.

Centrum Broking

Centrum pegs the company's net sales at Rs 38,636.1 crore, down 3.3 per cent QoQ and up 1.2 per cent YoY. EBIT is seen at Rs 9,485.2 crore, down 5.4 per cent QoQ but up 2.9 per cent YoY. Net profit is expected to come in at Rs 7,784.1 crore, down 3.3 per cent QoQ.

During June quarter, shares of TCS gained 14.2 per cent as against a 16 per cent rise in the S&P BSE IT index. The benchmark S&P BSE Sensex has rallied over 18 per cent during the period.