TCS Q1 Preview: Margin pressure to weigh; net profit may rise 6-9%

Tata Consultancy Services (TCS) is expected to register a single-digit growth in revenue and profit for the April-June quarter of fiscal year 2024-25 (Q1FY25), as compared to the same quarter in the year ago period due to a recovery in the flow business and willingness of clients to resume discretionary spending, however, wage hikes will negatively impact its margins, brokerages said. 

The company is scheduled to release its Q1 results on Thursday, July 11, 2024. According to brokerage estimates, TCS is likely to report a net profit in the range of Rs 11,771crore to Rs 12,140 crore for the June quarter, up 6-9 per cent year on year (Y-o-Y) against Q1FY24 where it reported Rs 11,074 crore. Sequentially, this could be a dip of 3-5 per cent. 

 

Revenue is expected to increase 4-5 per cent Y-o-Y between Rs 62,086 crore and Rs 62,491 crore, according to brokerage estimates. 

Key monitorables: Street will look out for the management’s commentary on cost takeout projects, banking vertical and outlook on client discretionary spend. Further the state of spending in the impacted North America market, hi-tech & telecom verticals,  pipeline of deals, and levers to defend and increase margins will also be key monitoring points for investors. 

Here’s what key brokerages expect:

Nomura: The global brokerage firm Nomura expects constant currency (CC) revenue growth of 1.5 per cent quarter on quarter (Q-o-Q) for TCS. We expect the BSNL project to ramp up gradually over the year.

We expect earnings before interest and tax (EBIT) margins to contract 150 basis points (bp) Q-o-Q with full quarter impact of annual wage hikes.

Nuvama Research: Analysts at Nuvama anticipate TCS to deliver 14 per cent Q-o-Q CC revenue growth and 1.1 per cent Q-o-Q USD growth, driven by a recovery in BFSI and continued strength in manufacturing. 

On the other hand, they expect the margin to fall by 140 bp Q-o-Q due to wage hike. 

They further foresee the deal win streak to continue and eye commentary on client spending and discretionary spends.

Kotak Institutional Equities: According to those at KIE revenue growth of TCS will be driven by ramp-up of strong order signings of earlier quarters. With their estimates including $150 million from the BSNL deal, leading to a marginal growth compared to the March 2024 quarter. 

Analysts said they expect weak revenues in financial services and telecom segments. 

Further they forecasted 140 bps Q-o-Q decline in EBIT margin due to wage revision and likely decline in utilisation rates. However,  TCS may see 140 bps Y-o-Y increase in EBIT margin. 

Moreover analysts said that they foresee US$11-12 bn of deal wins driven by high rate of closures of cost take-out deals . Renewal components in deals will be higher in our view.  

“Focus will be on TCS ability to leverage its strengths in 'Run' spends and outperform on revenue growth in FY2025E. TCS also has won quite a few mega deals which can contribute to 2.5 per cent growth in FY2025E,” the brokerage said in a preview note.

Motilal Oswal: The brokerage foresees a 5-7 per cent Y-o-Y revenue growth in constant currency (cc) terms for TCS. They further expect TCS' EBIT margin to contract by about 150 bp Q-o-Q, largely due to wage hikes.

ICICI Securities: Those at ICICI Securities said that they have built in 1.8 per cent CC Q-o-Q revenue growth for TCS driven by traction in BFSI, retail (consumer business group) and hi-tech segments from the deals announced in Q1. 

They forecasted its EBIT margin to decline by 186 bps Q-o-Q on higher employee costs. The brokerage awaits management commentary on enterprise discretionary spending, fewer deal announcements in Q1FY25, campus hiring, large deals and turnaround in BFSI.