Volume growth may lift TCS' Q2 bottom line

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Tata Consultancy Services is likely to post a 24 per cent year-on-year rise in its July-September net profit to Rs 1,229 crore, as per a NewsWire18 poll of 11 brokerages.

Revenue for the second quarter is seen up 25 per cent on-year at Rs 5,582 crore.

On a sequential basis, profit is seen up 4 per cent and revenue up 7 per cent.

Investors will closely eye improvements in operating margin and outlook for business volume growth for FY08 (Apr-Mar), when the company reports its September quarter results, after market hours on , Monday.

Though analysts do not have a fixed outlook number in sight, as the company does not give any guidance, a pointer that the market uses for future outlook on TCS is the number of employees added.

In the September quarter, analysts expect the total staff strength of the company to exceed 100,000. "We expect a gross addition of 10,000 employees in the second quarter," said an investor note by CLSA Asia Pacific Markets.

The company had an attrition rate of 11-12 per cent in the June quarter, with a staff size of a little less than 95,000.

TCS is the second large-cap information technology company to report its earnings this season, after Infosys Technologies' results Thursday.

Infosys disappointed the market with lower-than-estimated earnings per share guidance for 2007-08.

Operating margin is seen rising 90-150 basis points, sequentially, in July-September, as wage hikes have already been factored in the first quarter, according to a note by Religare Securities.

Cost per employee and operating costs are also seen reducing, thus providing room for margin improvement in the second quarter.

The rise should have been a little higher, but some promotional activity in the quarter and strong hiring would weigh on margins, said analysts.

CLSA expects the third quarter to be better for TCS, as the company has in the past performed best in the December quarter, the brokerage said.

In April-June, TCS held its grounds the best among large IT companies, in the face of a near 7 per cent appreciation in the rupee against the dollar. The company's foreign exchange hedge of $2.5 billion, as on June 30, is the largest among its peers.

However, a large foreign exchange hedge in this quarter will translate into a sharper sequential percentage fall in foreign exchange gains from the June quarter. The rupee has appreciated a mere 1.7 per cent on an average in July-September.

As a result, sequentially, net profit for the quarter is expected to remain "flattish", according to a note by Citigroup Global Markets.

TCS shares on Friday ended at Rs 1,063.50 on the National Stock Exchange, down 0.8 per cent from Thursday.