TCS Q1 results preview: Margin to take a hit; BFSI demand key monitorable

Tata Consultancy Services (TCS) is slated to announce its financial results for the first quarter (April-June) of the fiscal year 2019-20 (Q1FY20) on Tuesday. While the IT firm is likely to fare better than its peers, it is likely to take a hit on the margin front owing to wage hikes, high attrition, visa costs, and a strong rupee.

Additionally, weaker global macro-economic prints, US-China trade tensions, uncertainties around Brexit and moderation in BFSI (Banking, financial services, and insurance) spends are expected to hamper the growth prospects of the overall IT sector, including TCS, analysts say.

Moreover, the double-whammy of an increase in the minimum public shareholding to 35 per cent and a proposal to levy a 20 per cent tax on share buybacks are likely to have a bearing on the IT companies, going ahead.

TCS is one of the listed companies where promoter shareholding is above 65 per cent (72 per cent) cut-off outlined in the Budget speech, which according to analysts, will be negative and keep the stock under pressure in the near term.

For the quarter under review, TCS is likely to post revenue growth of 2.8 per cent - 3 per cent in constant currency (CC) terms on quarter-on-quarter (QoQ) basis, but may witness up to 45 basis points (bps) cross currency headwind which will dent growth in US dollar terms.

"We expect TCS to deliver 2.8 per cent CC revenue growth (2.6 per cent in USD terms owing to cross-currency headwinds). Rupee appreciation and wage hikes are expected to push EBITDA (earnings before interest, tax, depreciation and amortization) margins down by 50bps QoQ to 26 per cent," say analysts at Edelweiss Securities. Net profit or profit after tax (PAT) is likely to fall 5.2 per cent QoQ to Rs 7,703.5 crore. On year-on-year (YoY) basis, the numbers are likely to rise 5 per cent, the brokerage says.

Analysts at Nomura, on the other hand, believe the BFSI segment will hamper the growth prospects of the Indian IT companies. “Tech spending growth in BFS segment for the Indian IT companies is likely to moderate led by weaker client financials in the US and Europe BFS for Q1CY19, base effects from higher spending in 2018 by US banks due to one-time tax incentives, and weak macro with slowing GDP growth across key markets in CY19," they said in a result preview note.

In the first quarter of FY20, shares of TCS have risen 11 per cent, thus outperforming the benchmark Nifty50, which rose over 1 per cent. The Nifty IT index has gained nearly 2 per cent during the period, ACE Equity data show. 

Girish Pai, head of research at Nirmal Bang Securities expect a 1.3 per cent QoQ growth in revenue at Rs 38,515.9 crore. On a YoY basis, it is likely to rise 12.4 per cent. In constant currency terms, it is likely to see a growth of 3 per cent QoQ. Ebit (earnings before interest and tax) margin is likely to come in at 23.8 per cent, down 5.17 per cent QoQ. PAT is likely to fall 2.5 per cent QoQ to Rs 7,920.5 crore.

On YoY basis, TCS, Pai says, PAT is likely to see a rise of 7.9 per cent. “TCS is likely to witness nearly 45bps cross currency headwind which will result in a growth of 2.54 per cent in US dollar terms,” the analyst wrote in an earnings preview note, dated July 2.

Growth in the retail vertical, commentary on the macro environment, spends by retail clients, growth in digital and BFSI demand in North America and Europe are the key things investors will closely track in the commentary.