TCS may outline higher Q2 margin on Thursday; weak rupee to help firm

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At Tata Consultancy Products and services’ (TCS’) announcement on Thursday of its second quarter (Q2, July-September) earnings, analysts will be watching the Mumbai-based company’s statement on three of its segments.


These being BFSI — banking, financial products and services and insurance — manufacturing and retail. The segments are expected to give a broader sense approximately the information technology (IT) products and services sector’s performance in the quarter.


TCS, the IT bellwether, is expected to get pleasure from a weaker rupee and stronger North American growth in the quarter. On the other hand, client-specific challenges with regard to a few banking and manufacturing clients in Europe, and a few semi-conductor and equipment vendors, are likely to play a key role on if it ends 2019-20 with strong double-digit growth, say analysts.


The banking and financial products and services segment, particularly capital banking, has been stressed for a while in Europe. Some of the top Indian IT players, TCS is at the vanguard of executing probably the most large projects in this space. Its order bookings and statement on this will be keenly watched.


Analysts will also seek clarity on revenue influx from large deals, with the company having started disclosing the complete contract value (TCV) from these. In Q1 (April-June), it had reported outsourcing contracts with TCV of $5.7 billion, making it the fourth quarter in a row of signing deals more than $5 billion.


“We imagine continued pressure building up from the Europe BFSI will make TCS’ double-digit revenue growth challenging. (We also) Expect deal closure to be soft, because of a volatile macro surroundings,” said Aniket Pande, research analyst at brokerage Prabhudas Lilladher.


According to the latter entity, TCS is likely to outline fixed currency revenue growth of 3.2 per cent (quarter on quarter). And, operating margin is likely to expand by 150 basis points (bps), supported by rupee depreciation, absence of wage hikes and visa costs. On a year-on-year (YoY) basis, the margin might see a decline, because of limited talent provide and increase in the United States cost constitution.


TCS had in Q1 shown stable performance, by sustaining double-digit growth. It had reported a 11.4 per cent rise over a year in revenue at Rs 38,172 crores; this used to be 0.4 per cent higher over the previous quarter. In dollar terms, revenue at $5.48 billion, had grown 8.6 per cent over a year; in fixed currency, the upward thrust used to be 10.6 per cent. On the other hand, the revenue in dollar terms missed Road estimates.


“TCS will likely outline fair growth, with challenges in the financial products and services and retail verticals. We expect fixed currency revenue growth of 2.6 per cent and cross-currency headwind of 75 bps on a quarter-on-quarter basis. Q2 of FY19 had a high revenue base and will likely result in a deceleration in YoY fixed currency growth to a unmarried digit,” reported Kawaljeet Saluja, research analyst at Kotak Securities.


He feels net profit growth is likely to be modest, because of completion of its buyback programme. Progress on localisation initiatives in the North American markets will be watched, as that will guide the changing cost constitution situation in the region. IT companies across the board have been coping with increasing localisation requirements by hiring from American universities and going for contractual staff, either one of which have impacted employee cost.

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