Tata Consultancy Services, India’s largest software services exporter, will kick-start the technology earnings season, reporting its first quarter results later on Thursday evening.
Analysts expect the software bellwether to report a constant currency quarter-on-quarter growth of 3.5-4.0% in US dollar revenue, which will be better than the 1.5% sequential growth it posted in Jan-March. However, profit is expected to fall around 4.0-4.5% sequentially.
While cross-currency movements may benefit the company by around 40-70 basis points, particularly with the Japanese yen’s appreciation to the dollar, overall EBITDA margins (operating profit margins, before interest and depreciation and tax) are likely to decline 150-160 basis points sequentially, due to wage hikes that were effective April 1 and higher visa costs.
“We believe while demand will be robust, margin will remain in the 26-28% range due to lack of substantial margin levers (factors that push margins),” said Sandip Agarwal, an analyst at Edelweiss Securities.
The Tata Group company has been addressing issues in markets like Latin America, Japan and at its Diligenta insurance unit in the UK. However, fresh concerns have emerged due to the recent referendum in Britain to exit from the European Union. The company has a large exposure in the UK and in Europe; so the management’s comments on those markets will be keenly watched by the street.
“TCS has a higher exposure to the UK (14.9% of revenues as on Q4). It derives 13% of revenues in pound sterling. Moreover, it also has the highest exposure to banking, financial services and insurance vertical (41% of total revenues). Hence growth outlook would be keenly watched,” said Madhu Babu, analyst at Centrum.
Last fiscal, TCS increased spends behind digital, which contributed to 15% of revenue. Investments here as well as client spends are expected to remain high in digital. Investors will also eye pricing trends in traditional services, where there is competition for winning new deals.
“Outlook on spending trends in key verticals like financial services and retail, given weak macro environment, margin outlook and commentary on client activity are key things to watch out for,” said Manik Taneja, analyst at Emkay Global Financial Services.
TCS had indicated that there will be some impact on future hiring due to automation. Analysts reckon this will be a trend across the sector going ahead. So, hiring and attrition figures will also be key.
TCS shares ended up 1.2% on Wednesday at 2,491.40 on BSE. Since its fourth quarter earnings announcement on April 18, the stock has fallen 1.2%, significantly underperforming the broader BSE Sensex, which gained near 8% in the same period.
At 10.55 am on Thursday, TCS was trading 0.40% up at Rs 2,503. The scrip opened at Rs 2488.50 and has touched a high and low of Rs 2,512 and Rs 2472.05, respectively, in trade so far.