TCS Q3 preview: Cloud adoption, large deal wins may lift profit by 8% YoY

TCS board will consider the declaration of a third interim dividend to the equity shareholders

Information technology (IT) major Tata Consultancy Services (TCS) will kick off the December quarter earnings season for large-cap firms on Friday, January 8, when it will announce its quarterly numbers. The Tata Group company is likely to post a robust performance for the third quarter of the financial year 2021 (Q3FY21) on the back of strong demand in cloud adoption, tailwinds of large digital deals, project ramp-up and lower furloughs, believe analysts.

The board will also consider the declaration of a third interim dividend to the equity shareholders.

The IT firm's revenue in constant currency (CC) terms is expected to rise in the range of 2.4-4 per cent on quarter-on-quarter (QoQ) basis while it may grow between 3-4.5 per cent in dollar revenue. As for revenue growth in rupee terms, it is expected to be up between 3.4-5 per cent year-on-year (YoY) and 2.7-4.2 per cent quarter-on-quarter (QoQ). Besides, analysts expect TCS to post a 3-8 per cent year-on-year (YoY) growth in its Q3 net profit. 

That said, analysts see an impact on margins, led by wage hike and rupee appreciation but believe operational efficiencies; strong volume growth; and cost control measures could limit the impact.

Nirmal Bang Institutional Equities, for instance, expects TCS to deliver CC revenue growth of 4 per cent QoQ and dollar revenue growth of 4.5 per cent QoQ. "Being the market leader, TCS will be a key beneficiary of core transformation, higher cloud adoption and digital adoption. Moreover, it is a direct beneficiary of the persistent market share loss of key players such as Capgemini and Cognizant," the brokerage said in an earnings preview note.

Those at ICICI Direct, on the other hand, see a 3 per cent QoQ growth in revenue in constant currency terms. Further, cross-currency tailwind could lead to revenue growth of 3.6 per cent QoQ in dollar terms, the brokerage added. 

At the lower end of the spectrum, analysts at Elara Capital see the revenue improving up to 2.4 per cent QoQ in constant currency terms, led by growth in BFSI, communications and life sciences verticals, while the revenue in dollar terms is expected to rise 3 per cent to $5,586 million.

Meanwhile, analysts at Phillip Capital see a 2.7 per cent QoQ and 3.4 per cent YoY growth in revenue in rupee terms at Rs 41,224.9 crore while those at Nirmal Bang see a 4.2 per cent QoQ and 5 per cent YoY jump in revenue to Rs 41,830.4 crore.

According to analysts at ICICI Direct, the revenue may rise 3.3 per cent QoQ and 4.1 per cent YoY to Rs 41,470.2 crore. TCS had reported revenue of Rs  39,854 crore in Q3FY20 and of Rs 38,977 crore in the September quarter of the current fiscal (Q2FY21). 

EBIT and net profit
 

On the earnings before interest and tax (EBIT) front, Phillip Capital pegs the income growth at 12 per cent QoQ and 4.4 per cent YoY at Rs 10,411 crore from Rs 99,740 crore posted in the corresponding quarter of the previous fiscal, and Rs  92,970  crore reported in Q2FY21.

Meanwhile, Antique Stock Broking said it expects margin contraction of 120 bps QoQ, largely led by the negative impact of salary hike effective from 1st October 2020 which will be partially offset by operational efficiency. As for ICICI Direct, it sees a 111 bps contraction in EBIT margin. 

Further, ICICI Direct and Nirmal Bang project a 5.7 per cent YoY and 8.2 per cent YoY jump in PAT, respectively. The firm had reported a profit of Rs 8,118 crore in the same quarter last year.

“We expect PAT to rise 5.7 per cent YoY to Rs 8,578.4 crore and EBIT to Rs 11,404.3 crore, up 4.9 per cent YoY," ICICI Direct said in an earnings expectations report.

On the flipside, Phillip Capital expects TCS to post a 2.7 per cent YoY jump in profit at Rs 8,340 crore.

Key monitorables 
 

Investors should watch out for TCV value for the quarter, deal momentum, tenure and pricing and outlook on the BFSI segment, suggest analysts. Moreover, commentary by segment, particularly on retail, travel and product engineering services is also of key importance, they say.

“Deal pipeline, outlook on BFSI, retail and manufacturing vertical and payout trends are among key monitorable,” said a report by Phillip Capital. 

Shares of TCS have risen 14.86 per cent in the December quarter while on a year-to-date basis, they have added 6.59 per cent, data available with ACE Equity showed. In comparison, the NSE Nifty grew 24.30 per cent during the quarter under review while the Nifty IT index jumped 21.55 per cent.