 "TCS")
TCS, which will announce its results this Thursday, will set the tone for the sector. The company is expected to deliver dollar revenue (constant currency) growth in the 2.5-2.8 per cent range and margin improvement will be moderate. At these numbers, the second quarter will be one of the slowest for the company in the past three years.
TCS reported sequential growth rate of 3.9 per cent, 4.6 per cent and six per cent, for the second quarter (constant currency) of FY16, FY15 and FY14, respectively.
The company, though, does not provide forecasts. The Street will focus on management commentary on the demand outlook, especially the demand environment for the second half of the year, which is generally softer than the first half. TCS’ management commentary will be sought after on the banking, financial services and insurance (BFSI) vertical, largest revenue contributor at 40.9 per cent.
The Street will look to get more details on the announcement by the company last month that some clients are holding back discretionary spending, particularly the BFSI vertical in the US, resulting in sequential loss of momentum.
“We believe the pullback in discretionary spending will weigh on margins, too, derailing the company at least for FY17, from its targeted margin band of 26-28 per cent,” said a report by Motilal Oswal Securities. It said its earnings before interest and taxes margin estimate for the second quarter was 25.4 per cent. “Cross-currency headwind from 13 per cent exposure to £ (depreciated 8.5 per cent versus $) will be partly offset by about four per cent exposure to Japanese yen (appreciated five per cent versus $). We expect margins to improve by 45 basis points, quarter on quarter, largely led by normalisation of wage hike rolled out in the previous quarter and partly offset by cross-currency headwind,” said a note from Kotak Institutional Equities.
The Street will keenly look at the details of growth in the digital landscape, especially after Accenture attributed its recent growth numbers to the digital deals it has been winning. “Accenture continues to deliver much stronger results relative to peers driven by its Digital practice, and we expect this momentum to continue in FY17 with over 20 per cent growth,” said a report by Goldman Sachs equity research.
ISSUES TO WATCH OUT FOR
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Outlook on BFSI vertical going ahead
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Traction in new digital initiatives
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Growth in troubled sectors — energy, telecom and insurance
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Outlook on revenue from Japan
- Comments on improvement in margins
