Major IT player TCS widens Margins … Revenue rises 17%

TCS September quarter Results update –

TCS being a major IT player Tata Consultancy Services (TCS) has all set to start its Q2FY23 earnings season on October 10. Earlier it was seen that its shares have fallen 20 percent year-to-date (YTD) but it still outperformed its IT peers by a healthy margin. TCS is all set to announce its September quarter results on Monday.

Expectations from TCS-

TCS’ management expressed high optimism over the September quarter being better than the June one. During the June quarter, the company reported steady revenue growth but margin contraction turned out to be steeper than anticipated. Consolidated profit after tax (PAT) for TCS may jump 5.4 percent every year to Rs 10,151 crore in the second quarter of FY23 (July-September) while consolidated revenue is expected to increase 17.2 percent to Rs 54,949 crore, according to an average of estimates of five brokerages polled by Moneycontrol. The company had recorded a consolidated net profit of Rs 9,624 crore during the corresponding period of the last financial year when its consolidated revenues stood at Rs 46,867 crore. TCS had registered a PAT of Rs 9,478 crore during April to June 2022 period on revenue of Rs 52,758 crore.

The rise in Revenue –

TCS is leading in its September quarter. The revenue is this expected to rise by 4.1% quarter on quarter (QoQ) aided by rupee depreciation. The blue-chip company is expected to register 3.5 percent QoQ growth in constant currency terms. “This will be led by continued improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies, and ramp-up of deals,” said ICICI Securities.
Meanwhile, cross-currency headwinds of 220 basis points QoQ and 540 bps year on year (YoY) will be extremely high and this may impact dollar revenue, which has been estimated at $6,886 million.

Information on rising margins –

The EBIT margin for TCS is said to be improved by 50 bps on a sequential basis to 23.6 percent due to the wage pressure behind the company. Global brokerage Jefferies says margin expansion will be highest for TCS in the IT pack, driven by pyramiding, operating leverage, and pricing benefit, amidst continued pickup in travel/discretionary expenses and supply-side pressures.ICICI Securities believes the wage hike impact has already been factored in Q1 on continued high attrition pushing higher backfilling expenses as well as higher subcontractor costs. Both Jefferies and ICICI Securities have worked out EBIT margin of 23.6 percent while Elara pegs it at 23.5 percent.

Key growth drivers –
Many analysts after doing careful analysis believe that strong deal execution and robust contracting activity augur well for the company. “Despite the macro challenges in Europe, contracting activity remains strong for TCS, with the likes of M&S, Boots, Nokia, and Zurich Insurance,” HDFC Securities noted.

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